Form 1041

[Terry D EA]

New client's sister passed away. The client is the sister's executor and successor trustee per the revocable trust instrument and the will. Simple scenario. Sister is the grantor/trustee. Sister passes away in Jan 2024. Trust sells the house for approximately 800K capital gain. However, the trust gets the step up in basis to FMV at date of death. Three bene's that inherit the proceeds that are distributed per their percentages outlined in the trust. I think the fiduciary should file form 1041 to report the sale and distribution. Am I correct here? It is  capital gain but end result is no taxable income.

Also, the decedent was a resident of CA, no CA 541 if there was no income. My question is nearly the same here. Is the sale considered income even though there is no tax liability. Does that trigger the CA 541?

[DANRVAN]

11 minutes ago, Terry D EA said:

I think the fiduciary should file form 1041

Gross income of $600 or more, required to file.

 

13 minutes ago, Terry D EA said:

It is  capital gain but end result is no taxable income.

 

13 minutes ago, Terry D EA said:

sells the house for approximately 800K capital gain

After a stepped up basis?

[Terry D EA]

Yes. The original basis back in early 1980ish, was $128,000.00. The house sold this year for around $800,000.00 I'm giving close but approximate numbers. So, the basis steps up to the FMV at date of death.

Thanks for confirming my thoughts regarding the gross income and zero tax liability. I feel fairly safe this would apply to CA in the same manner. CA is specific at stating if no income don't file the form but again, the house sale is gross income and no tax liability. CA states income of more than 10K then file.

[BulldogTom]

15 minutes ago, Terry D EA said:

Thanks for confirming my thoughts regarding the gross income and zero tax liability. I feel fairly safe this would apply to CA in the same manner. CA is specific at stating if no income don't file the form but again, the house sale is gross income and no tax liability. CA states income of more than 10K then file.

If only it was that easy for CA.   There will be a 1099S for the sale of the home with $800K on it.   CA FTB does not know what the basis is on the property.   Most likely you will be talking to them at some point if you don't file a return.   

I would file the 1041 and 541 with zero tax liability.   You start the statute and take the position that there is no tax due.   You have given them the details they need to show no cap gain by filing the Sch D with the return.   Hopefully it is all done and your client can move on.   

IMHO, you can do this now, or you can prove that there is no tax due later, but one way or another you are going to have correspondence with the FTB.

Tom
Longview, TX

[DANRVAN]

33 minutes ago, Terry D EA said:

sold this year for around $800,000.00

 

53 minutes ago, Terry D EA said:

It is  capital gain

Not a capital gain.

[Sara EA]

I agree with Tom.  There will be a 1099S issued to the trust, and neither IRS nor CA will know the basis unless you file the tax forms.  The trust may actually show a loss that can be passed through to the beneficiaries.  It may have paid tax prep fees for the decedent's final tax return and will pay for the 1041 and CA forms (allowed to deduct even if not paid by the filing date if amount is known).  If the house was sold within six months or so of death, the sales price is the FMV, but surely there were closing costs that will net in a loss.  The trust can also deduct any real estate taxes paid before and at the time of sale.  Were there any attorney fees to handle all this?  Did the trustee receive a fee? Court fees? More deductions.

[DANRVAN]

1 hour ago, Sara EA said:

If the house was sold within six months or so of death, the sales price is the FMV,

But technically only in certain cases.

Section 2032(a)(1) states that for assets sold within 6 months of death, an election can be made to value on date of disposition.

However, paragraph (c) says:

"Election must decrease gross estate and estate tax
No election may be made under this section with respect to an estate unless such election will decrease—
(1)the value of the gross estate, and
(2)the sum of the tax imposed by this chapter and the tax imposed by chapter 13 with respect to property includible in the decedent’s gross estate (reduced by credits allowable against such taxes)"

[Terry D EA]

18 hours ago, BulldogTom said:

If only it was that easy for CA.   There will be a 1099S for the sale of the home with $800K on it.   CA FTB does not know what the basis is on the property.   Most likely you will be talking to them at some point if you don't file a return.   

I would file the 1041 and 541 with zero tax liability.   You start the statute and take the position that there is no tax due.   You have given them the details they need to show no cap gain by filing the Sch D with the return.   Hopefully it is all done and your client can move on.   

IMHO, you can do this now, or you can prove that there is no tax due later, but one way or another you are going to have correspondence with the FTB.

Tom
Longview, TX

Tom,

This is the exact route that I have let the fiduciary know they have to do. As for filing this now, the deceased passed in January of 2024. I can't prep a final 1040 but can the 1041 and CA541 be filed now using 2023 software? It appears to me that I should wait until Jan 1, 2025 to file the form 1041. Currently, I have the fiduciary looking for the disclosure statement, and any associated expenses. I don't think they will get the 1099S until after the first of the year if they even get it at all. 

[BulldogTom]

18 minutes ago, Terry D EA said:

Tom,

This is the exact route that I have let the fiduciary know they have to do. As for filing this now, the deceased passed in January of 2024. I can't prep a final 1040 but can the 1041 and CA541 be filed now using 2023 software? It appears to me that I should wait until Jan 1, 2025 to file the form 1041. Currently, I have the fiduciary looking for the disclosure statement, and any associated expenses. I don't think they will get the 1099S until after the first of the year if they even get it at all. 

I would wait.   Watch for a 592B withholding form in the sale documents.   CA withholds on out of state sellers of property in CA.   If CA withheld and the trustee does not know to to give you that doc, you may be leaving a refund from CA on the table.   The 592s are generally given at closing and not mailed the next year.  Check the TIN on the 592B because it may be the SS# of the decedent and not the EIN of the trust.

Look at the sales docs if you can and see if there was withholding to the state.   

Tom
Longview, TX

[Terry D EA]

7 minutes ago, BulldogTom said:

I would wait.   Watch for a 592B withholding form in the sale documents.   CA withholds on out of state sellers of property in CA.   If CA withheld and the trustee does not know to to give you that doc, you may be leaving a refund from CA on the table.   The 592s are generally given at closing and not mailed the next year.  Check the TIN on the 592B because it may be the SS# of the decedent and not the EIN of the trust.

Look at the sales docs if you can and see if there was withholding to the state.   

Tom
Longview, TX

Thanks Tom, my client was a resident of CA when the house was sold. Nonetheless, I will ask about the 592B document. Also, I'm not sure at this time if an EIN was applied for. I am still waiting for that information as well.

Thanks for your help!

[Catherine]

Beware of new rules in California!

Client of mine was executrix for a relative who lived in CA. Got the estate settled, sold the property, had all the payoff amounts from mortgage, final tax from town/county, estate closure letter. Distributed proceeds to heirs.

Almost two years later, county came back saying they had adjusted the RE tax, here's a bill for well over $10k, pay up. Attorney in CA said she'd never seen such a thing in 30+ years, but researched it and it was legit. 

Very luckily for the executrix, most of the heirs gave her money towards that bill, but she was still out of her pocket for about a third of it. 

Doesn't specifically deal with your sale-of-home issue, but the executor should at least be warned of this possibility.

[DANRVAN]

6 hours ago, Catherine said:

Almost two years later, county came back saying they had adjusted the RE tax, here's a bill for well over $10k, pay up. Attorney in CA said she'd never seen such a thing in 30+ years, but researched it and it was legit. 

I find that hard to believe.  In Oregon the statute of limitations to file a claim against a closed estate is four months.  A quick search shows California the same, I would question the attorney or get a second opinion.  

https://law.justia.com/codes/california/2007/prob/9100-9104.html

CA Codes (prob:9100-9104)

PROBATE CODE
SECTION 9100-9104

9100. (a) A creditor shall file a claim before expiration of the later of the following times: (1) Four months after the date letters are first issued to a general personal representative. (2) Sixty days after the date notice of administration is mailed or personally delivered to the creditor. Nothing in this paragraph extends the time provided in Section 366.2 of the Code of Civil Procedure.

[DANRVAN]

6 hours ago, Catherine said:

Beware of new rules in California!

updated from my previous reply

https://law.justia.com/codes/california/code-prob/division-7/part-4/chapter-3/section-9100/

2023 California Code
Probate Code - PROB
DIVISION 7 - ADMINISTRATION OF ESTATES OF DECEDENTS
PART 4 - CREDITOR CLAIMS
CHAPTER 3 - Time for Filing Claims
Section 9100.

Universal Citation:CA Prob Code § 9100 (2023)

9100. (a) A creditor shall file a claim before expiration of the later of the following times:

(1) Four months after the date letters are first issued to a general personal representative.

(2) Sixty days after the date notice of administration is mailed or personally delivered to the creditor. Nothing in this paragraph extends the time provided in Section 366.2 of the Code of Civil Procedure.

(b) A reference in another statute to the time for filing a claim means the time provided in paragraph (1) of subdivision (a).

(c) Nothing in this section shall be interpreted to extend or toll any other statute of limitations or to revive a claim that is barred by any statute of limitations. The reference in this subdivision to a “statute of limitations” includes Section 366.2 of the Code of Civil Procedure.

[DANRVAN]

6 hours ago, Catherine said:

, estate closure letter.

If the estate was closed I believe the court would have to approve the payment.  I can't imagine the court approving a $10,000 property tax adjustment 2 years after the estate was closed and the property sold.

[Sara EA]

My hunch is that since the home was in a revocable trust, the decedent was considered the owner and got to take advantage of CA's generous cap on property taxes.  Once she died, the trust became the new owner and a much higher (long-delayed) tax was calculated.  Most likely taxes are exempt from the statute of limitations.  If a CA attorney says it's legal, this is probably the case.

[Catherine]

On 11/18/2024 at 9:17 PM, Sara EA said:

If a CA attorney says it's legal, this is probably the case.

Client told me attorney said she'd never seen it before in over 20 years of estate work in CA - but that she checked, and it was indeed legal. She was horrified, too.