[AuntAng]

My friend's wife and her sister inherited their mother's personal residence, and the house deed was changed to their names (50/50). The house remained empty for more than 1 year and was converted to rental property. One month after the rental conversion, my friend's wife died intestate. State law requires her 50% to be distributed to her husband and 2 children - in thirds. The deed was never officially transferred from the wife to her husband and children. The house was rented for a total of 11 months and sold. The proceeds for his wife's 1/2 could not be distributed until one year after her passing, which crossed tax years. I have the following questions about tax treatment: Is this sale of business property? If so, how do you file the figures for his 1/3 of the 1/2? The house sold for $105,000, and his settlement was a little over $16,000. Can the sale be reported on his personal tax return or must he file one for his wife's estate for it? In which year is the return filed? When it was sold or the next year when proceeds were distributed? Where can I find more information to accurately report this tax situation. Thanks for any feedback or information.

[AtlantaTaxExpert]

Run, do not walk, to a competent local tax professional to handle this problem. This is NOT a return you want to try to prepare yourself!

Since the house was sold during the period when the estate was in probate, a fiduciary return (Form 1041) with a Schedule E plus Form 4979 (Sales of Business Property) will be required to account for the rental income and gain on the sale of the rental.