Form 1041: Sale of house - calculating gain/loss and deducting property taxes

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December 1, 2023
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I live in California and am using TurboTax Business 2023 to file a first and final fiduciary tax return (Form 1041) after the death of my mother (last parent). She owned a house in a revocable trust. I sold the house 4.5 months after she died. It is my understanding that the house gets a step-up in cost basis at her date of death. My trust attorney told me that if the house was sold within 6 months, I can use the sale price as the cost basis and no appraisal would be necessary. I have the following questions:

1) Since the house was sold 4.5 months after the date of death, the sale price would be the same as the cost basis resulting in no capital gain. Since there is approximately $100,000 in deductible selling expenses, does this mean there would be a loss of $100,000 and that this loss would be passed on to the beneficiaries in their K-1's since this is the final fiduciary tax return?

2) At my mother's date of death, the county re-valued the house for property tax purposes. We received a new property tax bill based on the higher value of the house for the time period from the date of death to the closing date of the sale. Is this property tax amount deductible on Form 1041 as local taxes?

Thank you in advance for anyone answering the above two complicated questions.

TurboTax Business Windows

Anonymous_

Employee

Your attorney is conflating the following alternate valuation date for estate tax purposes with the step up in basis.

In the case of property distributed, sold, exchanged, or otherwise disposed of, within 6 months after the decedent’s death such property shall be valued as of the date of distribution, sale, exchange, or other disposition.

See https://www.law.cornell.edu/uscode/text/26/2032

The best evidence of fair market value, and the only one the IRS must accept, is an appraisal by a certified real estate appraiser.

Critter-3

First the real estate agent you just used should be able to give you an evaluation to use for the DOD basis however I have always used the sale price if sold "close" to the DOD as that is the actual price a willing buyer is willing to pay. Add the closing costs to that basis then you will have a loss in the amount of the closing costs to pass thru to the beneficiaries. I have never seen an IRS letter on cost basis in the 30+ years I have been in business but keep all the paperwork just in case you do get one.

Anonymous_

Employee

@Critter-3 wrote:

.....I have never seen an IRS letter on cost basis in the 30+ years I have been in business but keep all the paperwork just in case you do get one.

Nor have I, except I have seen valuation issues with respect to estate tax returns. For a 1041, though, it's a long shot that the basis reported would be questioned unless it's totally out of whack.