Rio Rancho, NM asked in Probate and Tax Law for New York

Q: Are assets sold during probate to settle estate debts subject to capital gains tax?

If an estate entering probate has substantially appreciated assets and also has debts, such that some assets must be sold to settle the debts, are the proceeds from the sale subject to capital gains against their original basis or their stepped-up basis from the date of death?

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3 Lawyer Answers
Michael David Siegel
Michael David Siegel
Answered
  • Probate Lawyer
  • New York, NY
  • Licensed in New York

A: There is estate tax (above a certain value) on the value of the estate. There is income tax to the fiduciary for income realized during the administration of the estate. If assets are sold at a profit, the gain is on the difference between the date of death value and the sale price, which is commonly called the stepped up basis.

Nina Whitehurst agrees with this answer

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D. Steven Yahnian
PREMIUM
D. Steven Yahnian
Answered

A: Generally, there is only taxable gain from the sale of an asset that was included in the decedent's estate if the property is sold for more than its date of death value. But, be warned: certain types of assets do not obtain a date of death step up in income tax basis to fair market value. These types of assets are those that generate a type of income called income in respect of a decedent.

Income in respect of a decedent (IRD) refers to untaxed income that a decedent had earned or had a right to receive during their lifetime. IRD is taxed to the individual beneficiary or entity that inherits this income.

However, IRD also counts toward the decedent’s estate for federal estate tax purposes, potentially drawing a double tax hit. Fortunately, the beneficiary may be able to take a tax deduction from the estate tax paid on IRD. The beneficiary must declare IRD as income for the year in which the person received it.

Income in respect of a decedent is defined in I.R.C. section 691. Sources include the following:2

Uncollected salaries

Wages

Bonuses

Commissions

Vacation pay

Sick pay

Uncollected rent

Retirement income

A partner's share of partnership income earned before death, but not distributed to them

Sources also include the following:

Payments for crops

Interest and dividends accrued

Distributions from certain deferred compensation and stock option plans

Accounts receivable of a sole proprietor

Gains from the sale of property (if the sale is deemed to occur before death, but proceeds are not collected until after death)

1 user found this answer helpful

D. Steven Yahnian
PREMIUM
D. Steven Yahnian
Answered

A: Generally, there is only taxable gain from the sale of an asset that was included in the decedent's estate if the property is sold for more than its date of death value. But, be warned: certain types of assets do not obtain a date of death step up in income tax basis to fair market value. These types of assets are those that generate a type of income called income in respect of a decedent.

Income in respect of a decedent (IRD) refers to untaxed income that a decedent had earned or had a right to receive during their lifetime. IRD is taxed to the individual beneficiary or entity that inherits this income.

However, IRD also counts toward the decedent’s estate for federal estate tax purposes, potentially drawing a double tax hit. Fortunately, the beneficiary may be able to take a tax deduction from the estate tax paid on IRD. The beneficiary must declare IRD as income for the year in which the person received it.

Income in respect of a decedent is defined in I.R.C. section 691. Sources include the following:

Uncollected salaries

Wages

Bonuses

Commissions

Vacation pay

Sick pay

Uncollected rent

Retirement income

A partner's share of partnership income earned before death, but not distributed to them

Sources also include the following:

Payments for crops

Interest and dividends accrued

Distributions from certain deferred compensation and stock option plans

Accounts receivable of a sole proprietor

Gains from the sale of property (if the sale is deemed to occur before death, but proceeds are not collected until after death)

Nina Whitehurst agrees with this answer

1 user found this answer helpful

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