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Last Login: 1/6/2010 3:31:29 PM
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| Filing 2nd and final 1041. After decedent's home did not sell, executors rented it out. Two of four siblings are executors and all four siblings are equal beneficiaries. It sold this year with a 1231 loss. But it was sold to sibling of executors(at probably close to market value which is less than DOD value). I understand loss cannot be passed out to beneficiaries because it was sold to a related party, but can be used as a basis adjustment for purchaser. This was also part of a 1031 exchange, but I don't think that has any tax consequences to the estate, because the estate received cash. I'm not sure how to handle the loss on the 1041 since it is not being passed out and the software will want to allocate it. Also not sure how to notify purchaser of the amount of loss to be used as basis adjustment. Thanks.
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| Rob, I think I possibly may need to know more about the Section 1031 exchange. However using the facts presented as I understand them, if the estate received cash and not property which you have indicated then the loss would be recogized by the estate. This assumes that the estate sold the property to third party in the exchange and it wasn't distributed to the selling beneficiary. The question then is who was the residence sold to? Was it the third party or the beneficary? I assume that the beneficary ultimately end up with the residence. Looking at Section 267(b) I don't see a third party who is part of a Section 1031 exchange with a beneficiary included in the definition of a related party. If this is the case I don't think there is any deferral of the loss. This would seem to make sense since it is a third party that is negotiating the purchase price and not the related party so the presumption would be that the transaction is at arms length. If I am missing something here let me know more about the facts so I can expand on my response.
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Rob, assuming that Section 267 did apply to this transaction, you are correct in that the loss is not deductible by the trust or estate and is not passed out to the beneficiaries. The non-deductible loss goes the buyer of the property and is available to offset any gain to on the subject sale of the property by the related party buyer. If you let your tax software compute the loss it will want to allocate it to the beneficiaries.
We use Profx and based on what I saw there is no way to designate the loss as a Section 267 loss. Other tax software may provide that capability. In profx the accountant can override the computed gain or loss on a transaction so I would override the computation to show a zero gain or loss. In the description I would indicate (Section 267 Loss). That should report the transaction and get the loss off of the return. I would footnote the K-1 of the beneficiary purchasing the property that the Section 267 loss was allocated to him or her, provide the amount of the loss allocated and the property which created it and include a comment about the limitations on the deductibility of the loss. You could also show the basis equal to the sales proceeds thus no gain or loss on the return and provide the Section 267 information is a letter or statement attached to the beneficiaries K-1.
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| I agree with John but I have a hint for tax return presentation. When I must adjust a loss on Schedule D or equivalent, I use a separate line. To make a loss go away, I enter the net loss (after a description) in the proceeds column. To make a gain go away (when proceeds are reported on a 1099 in error), I enter the net profit (or proceeds) in the cost column. I also agree with John's suggestion to put the basis adjustment as a K-1 footnote. I do that if a passive activity is distributed with a basis adjustment to the recipient. Good luck with this!
Mary Kay Foss
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I have more information on the 1031 exchange. The related sibling exchanged a piece of land and some additional cash for the estate property. He paid his cash to an accommodator and the accommodator remitted the purchase price to the estate. The deed says that there was a simultaneous effectuation of all parties obligations and rights to transfer and receive property. So I guess we are back to the question of who the estate actually sold the property to and whether or not that was a related party.
Since the related sibling ended up with the property, I think it may be a stretch to interpret the transfer as a sale to the unrelated accomodator since there were simultaneous transactions.
Any opinions?
Thanks.
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| The previous post was from me but somehow it came through as anonymous. Rob
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