[WSBAPT] Capital gains exclusion on sale of residence for estate?

[Philip N. Jones]

That quote from Publication 559 does not address the use of the section 121 exclusion, and the position of the IRS has moved around over the years.  The IRS once took the position that a loss on the postmortem sale of a personal residence could not be deducted unless the estate had rented out the residence, SCA 1998-012, but apparently the IRS no longer takes that position.  For examples of cases that have held that the sale of a personal residence by an executor is always entered into for a profit motive, and thus losses are deductible, see Waterman Estate v. Commissioner, 195 F.2d 244 (2d Cir. 1952), reversing 16 T.C. 467 (1951); Wilmington Trust Co. v. U.S., 76-1 USTC ¶9372 (Ct. Cl. 1976), adopting 76-1 USTC ¶9163 (Ct. Cl. 1976).  In other cases, the sale of a residence was not deemed to have been entered into for a profit motive when the fiduciary allowed a beneficiary to use the property as a personal residence.  Barnes v. U.S., 222 F. Supp. 960 (D. Mass. 1963), aff'd 326 F.2d 825 (1st Cir.); Meurir v. Commissioner, 221 F.2d 223 (2d Cir. 1955).  In Watkins v. Commissioner, T.C. Memo 1973-167, a husband sold his deceased wife's personal residence shortly after she died, although he lived in it briefly after she died.  The Tax Court reasoned that if the wife had sold the residence during her lifetime, a loss could not have been deducted, but property acquired by inheritance has a neutral status, and the state of mind and/or conduct of the executor or heir after the owner's death must be examined in order to decide whether a profit motive was present.  The court decided that the husband's dominant purpose was a profit motive, regardless of his temporary use of the residence.  A similar result was reached in Miller v. Commissioner, T.C. Memo 1967-44, when there was no personal use of the residence after the death.
Phil Jones

Philip N. Jones
Duffy Kekel LLP
900 S.W. Fifth Ave. Suite 2500
Portland, OR 97204
pjones at duffykekel.com<mailto:pjones at duffykekel.com>
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From: wsbapt-bounces at lists.wsbarppt.com <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of John J. Sullivan, Esq.
Sent: Tuesday, March 21, 2023 8:06 PM
To: 'WSBA Probate & Trust Listserv' <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] Capital gains exclusion on sale of residence for estate?

No.

"If the estate is the legal owner of a decedent's residence and the personal representative sells it in the course of administration, the tax treatment of gain or loss depends on how the estate holds or uses the former residence. For example, if, as the personal representative, you intend to realize the value of the house through sale, the residence is a capital asset held for investment and gain or loss is capital gain or loss (which may be deductible). This is the case even though it was the decedent's personal residence and even if you didn't rent it out. If, however, the house isn't held for business or investment use (for example, if you intend to permit a beneficiary to live in the residence rent free and then distribute it to the beneficiary to live in), and you later decide to sell the residence without first converting it to business or investment use, any gain is capital gain, but a loss isn't deductible."

Publication 559 (2022), Survivors, Executors, and Administrators | Internal Revenue Service (irs.gov)<https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.irs.gov%2Fpublications%2Fp559%23en_US_2022_publink100099689&data=05%7C01%7Cpjones%40duffykekel.com%7C2d1a5268250b4ba2512508db2a82be0e%7C2d66ed5354fa4c2f8c4dbff1aca5479d%7C0%7C0%7C638150513253003569%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=VtrBqTBmJc0BJbinq55VNAUKoLcLNg5Gqq3uE6a1pc8%3D&reserved=0>

John J. Sullivan

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Eric Nelsen
Sent: Tuesday, March 21, 2023 5:02 PM
To: 'WSBA Probate & Trust Listserv' <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: [WSBAPT] Capital gains exclusion on sale of residence for estate?

I can never remember how this works and have to be re-taught every time-if an estate sells a decedent's residence a year after death and there is a small capital gain due to post-death appreciation, can the estate take advantage of the decedent's $250,000 exclusion on capital gains from sale of residence?

Sincerely,

Eric

Eric C. Nelsen
Sayre Law Offices, PLLC
1417 31st Ave South
Seattle WA 98144-3909
206-625-0092
eric at sayrelawoffices.com<mailto:eric at sayrelawoffices.com>

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