some 1041 help please

[TAXMAN]

TP decease 2012. Estate consisted of house only. Exec paid all bills of the estate including re taxes, ins, water, bills etc to prepare this house for sale. In 2017 Estate sold the house, paid back the Exec for every thing she paid for then distributed the remainder to the heirs. In the accounting provided the commissioner of accounts who accepted it and signed it as now closed allowed all the payback (very detailed with checks and receipts). The 1099 for the sale was issued in the estate name and FED #.

since IRS will be looking for this income in the estate # 1: show this sale on a 1041 and the distributions accordingly? #2 Since all the bills were deemed paid by the estate at closing can they be used in the filing the 1041 return?

No 1041 forms ever filed.

The will directed that the real estate be sold to effect a cash distribution to the heirs.

Suggestions on how to proceed

[SaraEA]

The problem you present is that the house was sold FIVE YEARS after the TP died.  For basis you will use FMV at date of death.  All you can add to basis that I can think of are the realtor fees, title transfer, state tax stamps--those items at the bottom of page 2 of the HUD.  Also the cost of any improvements made to make the place saleable.

If the house was sold reasonably soon after death, the estate could make a case that the maintenance fees, taxes, utilities, etc. were part of the process of liquidating the asset so the value could be distributed to heirs.  RE taxes would be deductible in the year paid, and the rest as 2% misc deductions.  Attorney fees could be added to basis.  The fact that it took so long suggests that the house was being used by someone--a beneficiary?--or no one took responsibility and let it languish.  In this case attorney fees can be deducted as administrative expenses, and the RE taxes for the year of sale can be taken (be sure to subtract what the buyer repaid shown on the HUD), but I don't see a way to deduct prior years taxes or the maintenance because it clearly wasn't being maintained all those years to attract a buyer.  Note that your fee for preparing the 1041 can be deducted (not subject to 2%) even if not paid yet--the code actually allows it.

No 1041 was required for prior years because there was no income.  When you file the 1041, you will have to include an explanation as to why the estate was open for more than 2 years.  Hope this helps.

[jklcpa]

If the estate was deemed to have paid the expenses itself, why couldn't it make an election under sec 266 to capitalize these carrying charges on unproductive real estate?  Election is standalone year by year and made by filing with each year's original return, and no returns were filed, so could the estate file these late and capitalize those expenses?  More questions than answers, but just thinking that this might work.

Of course, I do realize that the real fact pattern is that the exec footed the bills and wasn't reimbursed until the home sold because it's a situation of a cash poor estate with the only asset being the house, so it had no available funds to pay expenses directly, not an unusual circumstance.  I've seen this before, and also where an elderly parent adds a trusted child to a checking account for convenience when a child is helping out, and then the child-executor continues to pay the estate expenses out of that same joint account, and the attorneys report all of those payments as if made by the estate. 

Edited January 7, 2018 by jklcpa
changed wording for better clarity

[SaraEA]

Good questions, Judy.  I think any answers hinge on why the house wasn't sold for five years.  Was a family member living there?  If so, no deductions. Were the heirs fighting over their fair share or contesting the will?  Was the title in limbo and had to be litigated?  Those reasons might work.  Taxman will have to research whether the 266 election can be made late.  Please share your findings.

[TAXMAN]

House sat empty because it was in need of some major repairs just to sell the thing is my understanding. They still had to pay RE taxes and insurance along the way. In fact the deed was never transferred to anybody. I can tell looking at what the estate paid back to the adm at closing indicates a lot of repairs and improvements just to make it saleable or take a beating on the sale price.