My Mother-in-Law passed away in may. She owned a home and in her will she left it to her two children. At the time of her death it was recorded in her name. When we were going through her papers we found a deed she had made in 1985 putting the house in the kids names, it was notarized but not recorded. The local county atty. Told us to record it. We the auctioned the house in July. How do we report these proceeds from the sale of the house? Do we have to report them at all? Help we are very confused.

The sale of the house is reported on schedule D in your Federal tax return. The house received a step up in basis at her death. (Cost basis became the fair market value on the date of her death). Therefore, there would be little or no gain. If there is a loss, it is non deductible and it should be shown as a break even.

CBMB is wrong!

You do NOT report the sale of the home on YOUR tax return because, at the time of the sale, the house did not BELONG to you; it belonged to the estate.

The sale is reported on the FIDUCIARY return (Form 1041) filed by the estate's executor. It is likely to show little or no capital gain because of the stepped-up basis noted in CBMB's posting, but it must be reported, because the sale was reported to the IRS on Form 1099-S and they WILL want an accounting for the sale proceeds.

My interpretation of the facts was that the house was recorded in the beneficiary's name prior to the sale; therefore, the kids sold the house and it goes on their tax return on Schedule D. The estate did not own it at the time of sale.

If that is the case, how can they have stepped up basis?

BTW, I was a bit strong in my first sentence of previous post! Sorry!

Although the IRS could argue otherwise, I would argue that the actual "transfer date" was after death and before the sale, when the recording took place.

In that case, they definitely want to take the position that the house was inherited not gifted. If inherited the gain from the step up in basis is reflected on the estate return. However, there is an estate tax exclusion of 2 million. If the estate was under 2 million, no tax is due and no return has to be filed. Inheritances get a step up in basis and the date of death is the acquisition date (new holding period begins).

Again, the argument would have to be that the transfer date (recording) occurred after death and before the sale... and that it was an "inheritance", not a gift.

Thanks for the apology... it was a little rough but I didn't take offense since I've spoken to you before. :o

Okay, then! PAX!

Right back atcha ATE - PAX!