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Anyone ever heard of the IRD (Income in Respect of Decedent) tax???????
I never give the IRS credit for running out of ideas to tax us a different way, but this one really caught me. Whoever said you can't take it with you was probably referring to the heirs as well as the deceased.
Here's the skinny: IRD is income, including income from the sale of a rental property, that is taxed because the Fed feels the person would have paid tax on this income but (s)he had the bad manners to pass away before receiving it. Thus the money would go to his heirs, escaping tax. The IRS cried foul and said basically, "Just because the guy died you don't get the dough tax-free. No, no, no! You gotta pay tax on that money because had the decedent lived HE would have paid tax!" Go figure.
Anyway, I listed my 99 YO mother's rental property while she was well and suddenly she took ill. She might recover or, sadly, she might not. But if she passes while the property is in escrow her heirs could be on the hook to pay this dastardly tax (which tax ISN'T dastardly? ) which could reach 40%!!!
Apparently, from what I can gather, the tax kicks in because she (or I as sole Trustee) listed the property while alive but passed before the sale could be consummated in our scenario. Thus she was expecting the income from that sale (capital gains IS income) and because it is income in respect of death it is liable for the IRD and heirs don't receive the step-up in basis.
Anybody know anything about this tax and is it applicable to our situation?
I hadn't heard of this before but it actually makes sense. If you, as Trustee or agent for your mother, accept an offer and are under contract to sell, simply awaiting closing, the taxes would be the same as if the sale merely went through. There would be no change to the amount that you, as the inheritor, would have ultimately received after the sale. However, from the sounds of it--and you would definitely need to check with a tax professional--if your mother should pass away before the house is under contract, you should immediately pull the listing and not accept an offer.
I hadn't heard of this before but it actually makes sense. If you, as Trustee or agent for your mother, accept an offer and are under contract to sell, simply awaiting closing, the taxes would be the same as if the sale merely went through. There would be no change to the amount that you, as the inheritor, would have ultimately received after the sale. However, from the sounds of it--and you would definitely need to check with a tax professional--if your mother should pass away before the house is under contract, you should immediately pull the listing and not accept an offer.
The property, unfortunately IS under contract and I would be on the hook for the commission. It's a "which is the greater evil" situation. But as I read it the tax actually could be subject to double taxation, though one tax would be cancelled out by the $11 million estate exemption. The big question is whether the tax jumps from the 20% capital gain tax to 40% tax on ordinary income. The basis is $16K and the sale will be in the $725K neighborhood. But my mother will need the income if she pulls through. They got ya coming and going.
Heirs are never on the hook to pay anything. An estate must be settled to pay any owed debts and taxes. What remains can be divided between heirs. The portion that is owed to others was never property of the heirs.
Income in respect of a decedent is certainly not new. It's been around as long as estates have taxed. Estates and trusts can, and sometimes do, have income tax liabilities and estate tax liabilities. This is what the IRS says about deductions, income and taxes in respect of decedent: https://www.irs.gov/pub/irs-pdf/p559.pdf
Gains on the sale of property are taxed as a capital gain. If you do the calculations correctly, there is no double taxation. The gains are taxed as income because taxes have never been paid on the gain. If your mother is living when the house is sold, the gains will be taxed in the year of sale. Since this was not her residence, there is no exempted amount.
Heirs are never on the hook to pay anything. An estate must be settled to pay any owed debts and taxes. What remains can be divided between heirs. The portion that is owed to others was never property of the heirs.
What is Income in Respect of a Decedent?
Income in respect of a decedent (IRD) refers to untaxed income that a decedent had earned or had a right to receive during his or her lifetime. IRD is taxed to the individual beneficiary or entity that inherits this income. However, IRD also counts toward the decedent’s estate for federal estate tax purposes, potentially drawing a double tax hit. Fortunately, the beneficiary may be able to take a tax deduction from estate tax paid on IRD. The beneficiary must declare IRD as income for the year in which the person received it.
This tax is not new. It has always existed under estate taxes. Whoever is handling distribution of the estate will hold back money in anticipation of these taxes after final distribution. After the estate is closed and final taxes paid anything left is distributed to the beneficiaries. Personally the beneficiaries don’t declare it on their income tax but a 1040 is done for each year the estate is still in probate. This is why most inheritance isn’t distributed until near finishing probate. In the case of the house, as soon as it closes taxes are paid by the estate and remaining money is distributed or put in the estate account to be distributed later. As far as I know if a contract is signed and owner dies the estate is contractually bound but if no sale contract existed the agreement between realtor and deceased is null and void. This may differ for you since you are involved in the agreement with realtor as agent.
Under Sec. 691(a), IRD must be included in gross income by the estate or other person who acquires the right to receive the income for the tax year when received.
The only time an heir might have to pay taxes on this income is if after the estate is closed, income due the deceased comes in. This scenario is not common but if you are in doubt about it work with a tax accountant familiar with estates.
Last edited by NorthofHere; 08-21-2019 at 03:13 PM..
Income in respect of a decedent (IRD) refers to untaxed income that a decedent had earned or had a right to receive during his or her lifetime. IRD is taxed to the individual beneficiary or entity that inherits this income. However, IRD also counts toward the decedent’s estate for federal estate tax purposes, potentially drawing a double tax hit. Fortunately, the beneficiary may be able to take a tax deduction from estate tax paid on IRD. The beneficiary must declare IRD as income for the year in which the person received it.
Only if you accept the inheritance or benefit from the decedent. You can say, "no, thank you".
Again, you are looking as the entirety of the profit of the sale as "yours", when, in fact, there are taxes owed that will be collected later. That "tax portion" of the profit is NOT your inheritance.
A good CPA or tax guy should be able to find SOMETHING where you can cancel out some of that taxable income.
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But if she passes while the property is in escrow her heirs could be on the hook to pay this dastardly tax (which tax ISN'T dastardly? 
) which could reach 40%!!!
