capital gains

[ladybg1]

What is the name of your state?Fl Sold my dad's house in probate. He bought 50ys ago $16,000. Sold for $295,000. When he passed, houses were selling for $170,00.00. From what I have read-we place the value for the house at the value on death-$170,000. This would mean a capital gain of $125,000. I think I read that if it is not over 250,000, we don't owe any capital gains tax. Does anyone know if I am correct? I have withheld $2000 from each of the heirs, myself included & they know about it, until I know for sure we don't owe the IRS any money. Would like to be completely done with this stuff

[abezon]

The heirs got a basis step-up when dad died. They inherited the house with a basis equal to its fair market value on his date of death. If the house sold for more than that, any profit is long term capital gain to the heirs.

An heir can only avoid paying taxes on the LT gains of the house sale if the heir lived in & owned the house for 2 of the 5 years prior to sale. Any heir who did not live in the house and own it for 2 years has to pay taxes on the net gain.

As executor, it's your responsibility to calculate the gains. You may want to speak with a tax pro who has experience with estate tax issues. If you had to make any improvements to sell the house, you can capitalize those expenses. You may be able to capitalize other expenses, too (like property taxes). The estate pays for the tax pro's advice.

[ladybg1]

looks like i missed the part about the heir having to live there for 2 yrs-good thing I withheld some of the $$ for each of us to cover this. Next step will be a tax advisor

[ladybg1]

since it looks like we will haave to pay the tax-any idea how much the tax would end up being & do we each have to include 1/3 of the gain on our taxes for 2005?

[abezon]

5 or 15% depending on the heir's other income.

The capital gains get passed through to the heirs via the estate's tax return (1041) and K-1s. I suggest you consult an estate tax expert soon, as you may need to have the estate "closed" by a certain date to minimize the tax bite. Capital gains are usually allocated to principal, which is taxed at the estate level (generally a higher rate). The exception is in the estate's final year, the proncipal gets distributed too, which allows the gains to be taxed on the individual heirs' returns, and is probably cheaper.