Rental sale / Estate

Forum|Forum|1 year ago
April 21, 2025
1 reply
8 views

Taxpayer’s spouse passed away in 2018. The spouse solely owned a rental property, but the rental activity continued to be reported on the taxpayer’s personal return from 2018 through 2024. In 2024, the rental property was sold, and the proceeds were made payable to the estate of the deceased spouse. To deposit the check, the taxpayer obtained an EIN for the estate. Shortly after, they received a notice from the IRS indicating that estate tax returns may be due going back to 2018.

Given that (1) the rental property was titled in the deceased spouse’s name, (2) rental income and expenses were reported on the surviving spouse’s returns for multiple years, and (3) the sale proceeds were issued to the estate, how would you approach reconciling this situation? Specifically, what would be the best path forward in terms of addressing potential missed estate filings and ensuring the sale is reported correctly?

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BobKamman

Level 15

" they received a notice from the IRS indicating that estate tax returns may be due going back to 2018."

I would take that as IRS also saying that estate income tax returns may NOT be due going back to 2018. And that the IRS computer is programmed to suggest to every EIN applicant that tax returns may or may not be due. The notice of the new EIN always tells people they have to file for the current year, when in most cases they don't.

I wouldn't respond to a generic IRS computer notice. Was all the income reported by the surviving spouse? Did someone think to step up the basis for depreciation? What basis and depreciation was used for the 2024 sale?

MGC94Author

Level 7

02/15/2005 136,000.00

07/31/2024 240,000.00

Deprecation recapture 95,727.00

Can you still do a step-up basis? Basis and depreciation stayed the same as it was before taxpayer passed.

Yes, surviving spouse reported all the rental income on personal return

F

Frustrated-in-IL

Level 8

As Bob pointed out, there should have been a basis adjustment to date of death value and depreciation should have started again using the date of death value. So that is another issue. Fortunately, you can fix this by using Form 3115 and capturing the missed depreciation on the current return. See Rev. Proc. 2015-13 and subsequent Rev Proc updates. The end result should be a 481(a) adjustment on the 2024 return.

But what return is the question. Was the spouse the beneficiary from the estate? Did the spouse get the rental income annually? If so, you could claim that the tax got paid where it should have gotten paid annually by the correct person. You could take the 481(a) adjustment on this years Form 1041 and if ever questioned, explain away.

Did you already file the 2024 Form 1041?

Sorry to say this, but I'm glad its not my mess to straighten out.

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