[GaWizard]

My mother passed away in 1990 and my brother, sister and I inherited her property which consisted of a small house. However her will stipulated that we could not sell the House until after my daughter turned 25, which was in Oct of 2006. This meant that we were to rent the house and the proceeds of the rental were to be split between my daughter and a niece for their education until each reached the age of 25. My brother was the executor and established trust funds for each of the two girls and dispersed the funds as they needed them until they reached the age of 25.

The house was appraised at $47,000 within 6 months of my mother's death and it we sold it for $78,000 in Dec of 2006. There was a net gain of $31,000 in value of the house between her death and when we sold it, however the house remained in the name of "The Estate of ...." and never was in my name or my sister's name until it was sold. Do we have any Tax responsibilities for the $31,000 increase in value of the house when we sold it?

[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 [email protected] if you have further questions.

[ScottGem]

To ATE,
This question piquéd my curiousity. I started to answer it then realized it was out of my knowledge base. But I'm wondering how 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 dissolved 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.