AtlantaTaxExpert

GA Wizard:

How was the rental income reported? Was it reported on your return, your brother's return or your sister's return? Or was an estate fiduciary return (Form 1041) filed each year to account for the rental income and expenses on Schedule E?

The answer to these questions will dictate who has responsibility to pay the captal gains taxes.

BTW, the capital gain will be a LOT higher than $31,000. The reason is that the house, being a rental property, must be depreciated over 27.5 years. This depreciation would be claimed on Schedule E and used to offset the rental income received. In fact, it is the norm that rental properties normally have a "negative" income flow for tax purposes due to the depreciation.

This depreciation MUST be subtracted from the $47,000 basis when computing the capital gains tax, whether the depreciation was claimed on Schedule E or not!

This is black letter tax law; no interpretation needed!

You and your sister need to discuss these matters with your brother to determine how the rental income and expenses was reported for the last 16 years.

If you find out that it was NOT reported on ANY tax return, run, don't walk, to the nearest qualified tax professional. It is likely the estate has 16 years of tax returns (Form 1041 with Schedule E) to file. On the 2006 tax return, a capital gains tax will be due on about a $61,000 capital gain.

My guess is that the tax bill will be about $9,000. Hopefully, the estate has the funds.

Contact me at if you have further questions.

ScottGem

To ATE,
This question piqued my curiousity. I started to answer it then realized it was out of my knowledge base. But I'm wondering how the the inheritance tax exclusion comes into play here. Since the estate was well under the threshold, wouldn't that have a bearing? Even 16 years of rental income wouldn't seem to push it over the top.

Also, since the executor established a trust for the girls how does that bear on the issue?

AtlantaTaxExpert

The fiduciary return is a completely separate return from the estate tax return. It is essentially an income tax`return for the income the estate earns.

ScottGem

I think I understand that, but where I'm still not clear is how the inheritance tax bears here. Since the value of the estate was under the threshold, once the estate trust was disolved and the inheritance distributed wouldn't there be no tax liability if the amount distributed was under the threshold?

AtlantaTaxExpert

Sott:

Assume the total estate was $1.8M, all in CDs. At 5%, the estate's CDs would earn $90,000.

The fiduciary tax return pays the income tax on that interest earned.