Level 3

Question

How to report sale of home exclusion for surviving spouse

Forum|Forum|11 months ago
July 31, 2025
4 replies
37 views

The sale of home is being reported on the 1041 Estate tax return. After applying the step up basis there is a 344K gain which will show on the surviving spouse’s K1. Both spouses lived in the house and would qualify for the primary residence exclusion. The house was sold less than 2 years after the date of death, so the surviving spouse also qualifies for the entire 500K exclusion.

I’ve played with the SOH worksheet on the 1040 but can’t seem to link it to the K1 capital gain on the individual tax return.

How should this be reported? Does it get indicated on the 1041 K1 or how would I best manipulate the 1040?

ProSeries Professional

T

TaxGuyBill

Level 15

My first comment is to back up a bit and ask if it should even be on the 1041. Many home are owned as Joint Tenants with Rights of Survivorship (JTWROS), in which case the living spouse would own the entire home after the death of the spouse (and therefore the entire sale would be reported on the 1040 of the surviving spouse, and nothing on a 1041).

What circumstances are there that the sale is being reported on the 1041? Is the entire sale being reported on the 1041, or only half?

BobKamman

Level 15

But many homes are owned in a revocable living trust. Many of these trusts were written back in the time when there was no portability of the spouse's exclusion, so they provided "when the first dies, split the trust into two new trusts, and one is irrevocable." Some of them would provide, "but don't put the primary residence into that trust, because of adverse tax consequences." Meanwhile, others just have cookie-cutter boilerplate verbiage that results in problems like this.

So, first question, who owned the house? A trust? What does the trust say about what happens when the first spouse dies? How did you determine the stepped-up basis of the house? Did its value increase in the "less than two years" from death to sale?

A

Asia11Author

Level 3

This is not a trust. Its an estate. All assests went through probate and were sold though the estate.

IRonMaN

Level 15

Curiosity sometimes gets the best of me so I'm just curious as to how much the house is worth if it went up 344K in less than two years.

Slava Ukraini!

A

Asia11Author

Level 3

It and the adjacent lot was appraised at 1,082,000 and sold a year later for 1,577,578. There are closing costs/commisions etc. that brings it down to 344k

A

Asia11Author

Level 3

I ended up making an informational note on line 14 of the k1indicating how much of the capital gain applies to the exclusion... I have not processed the return so I'd like to hear if anyone has other solutions in mind. Still working on the 1040 end of it

qbteachmt

Level 15

From the beginning, you state surviving spouse. But you never directly answered if this spouse was listed on the deed as an owner, owner with right of survivorship (and therefore inherited), or tenants in common. So, that's one choice of three that makes a difference, both for basis and for gain.

Example: If the spouse was joint owner, and with right of survivorship, then she owned 100% of the property after the date of death.

"The house was sold less than 2 years after the date of death, so the surviving spouse also qualifies for the entire 500K exclusion."

Yes, that's a Federal tax provision. That doesn't affect real estate ownership. That long after death, the house would have been owned by a person who was not dead. There is no estate for the sale of the house. The surviving spouse owned and sold the house. It should all be on her taxes and reported by her.

Whoever gave the guidance to the listing and the sale apparently did it wrong.

Don't yell at us; we're volunteers

A

Asia11Author

Level 3

Thank you for your reply. My client did share ownership, sorry I thought I had covered that. The appraisals that were filed in court show the full value of the properties and then half the amount as the estates value so her ownership and half value is documented there as well. An additional parcel not previously discussed was included in the sale with a partial additional heir. Maybe that is why it was listed this way. My client was the executor and only other heir.

Even though the appraisals show half the value to the estate, the sale shown on the settlement statement shows the entire value and that’s how it was filed on the 1099S

qbteachmt

Level 15

"My client did share ownership"

This is the surviving spouse? How is she listed on the title? How did she "share" ownership?

Once the other owner died, the surviving owner(s) inherit, unless the property was in a trust. This is why the title/deed matters.

"The appraisals that were filed in court show the full value of the properties and then half the amount as the estates value"

Why is the estate involved at all? The estate never finished all the inheritance and transfers?

"so her ownership and half value is documented there as well."

The other half is what is confusing. Which State is this, and what is listed on the title? It's that basic of an issue.

"An additional parcel not previously discussed"

Which has its own deed, or not? If so, what's listed on the title?

Real property is owned by Deed. The Deed overrides any will or estate, because it establishes ownership all by itself.

"was included in the sale with a partial additional heir."

Partial heir or someone inherited or it was co-owned? Your terminology isn't standard to the issues and details. How did the deceased own this parcel, who else was on the deed, how are the name(s) listed?

"Maybe that is why it was listed this way. My client was the executor and only other heir."

That's a Will. That has nothing to do with Deeded property unless there is no owner available after the death of the deceased owner. Property only falls through to Estate probate because it wasn't addressed via the title/deed, via a Transfer on Death deed (if this State allows that). and is essentially orphaned.

Otherwise, was the Estate and will handled after death?

"Even though the appraisals show half the value to the estate"

An estate can't sell something it doesn't own. If the property legally transferred to the other spouse At Death of the first spouse, there is no property held by the estate.

"the sale shown on the settlement statement shows the entire value and that’s how it was filed on the 1099S"

Is there an Estate EIN on the 1099-S or the dead spouse's SSN?

Who guided the spouse through this? Who helped put the house up for sale?

Don't yell at us; we're volunteers

BobKamman

Level 15

So now we have a primary residence that goes to the surviving spouse; an adjacent lot that qualifies as part of the primary residence; and an additional parcel involving another heir (maybe a stepchild of the surviving spouse) that may or may not be that additional parcel.

I would check to make sure the appraisal covered everything, not just the primary residence on its own lot. If that was worth $1 million, and the total sale was $1.3 million, an additional parcel would explain the difference, not appreciation in less than a year after death.

If the estate isn’t closed (the tax returns haven’t been done, what else is pending?) and this is not a final return, how do you distribute capital gains to anyone, on a K-1?

I don’t know of any authority for claiming Section 121 on a 1041. All the gain came after death; the purpose of Section 121 is to exclude gains while people live in their home. I suppose you could try, and attach a Form 8275 disclosure statement.

In any case, tax is assessed on income and not on pieces of paper. The name and TIN on the incorrect 1099-S is irrelevant. The surviving spouse reports half the transaction directly on a 1040. That half qualifies for the exclusion.

Problem could have been avoided if the estate had distributed the property to the survivor before it was sold. But with other parcels and other heirs involved, maybe there was a negotiated settlement with other factors that prevented this. Messy estates often result in messy tax returns.

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