On June 1, Nathan entered into a contract to sell real estate for $1,500,000 (adjusted basis $250,000). The sale was conditioned on a rezoning of the property for commercial use. A $40,000 deposit placed in escrow by the purchaser was refundable in the event the rezoning was not accomplished.
Nathan died unexpectedly on November 1. After considerable controversy, the rezoning application was approved on November 10, and two days later, $1,460,000 was paid to Nathan’s estate in full satisfaction of the purchase price. Discuss the estate and income tax consequences of this scenario, assuming that the sale of the real estate occurred:
- After Nathan’s death.
- Before Nathan’s death.
When do you think the sale occurred? Why? Address each of these options and explain your conclusions. Support your findings with references from the text, the partial list of research aids below, and/or other related tax code, regulations, etc.
Partial list of research aids:
Â§ 691 and 1014.
George W. Keck, 49 T.C. 313 (1968), rev’d 69â€“2 USTC Â¶9626, 24 AFTR 2d 69â€“5554, 415 F.2d 531 (CAâ€“6, 1969).
Trust Company of Georgia v. Ross, 68â€“1 USTC Â¶9133, 21 AFTR 2d 311, 392 F.2d 694 (CAâ€“5, 1967).
Do the discussion and do the response each posted down below.
In general, the real estate closing date is when the sale transaction is officially completed. You will sign a lot of paperwork, including signing the deed to the property over to the buyer. During the process, there is an escrow account for the deposit of earnest money while other parties underwriting the loan. In this scenario, I believe that property sold date should be considered after his death. The $40,00 was put into escrow which is refundable in the event the rezoning was not accomplished. When we buy a house if the inspection find some severe problem then we can withdraw our intent of buying, so the deposit of $40,000 with contingence condition should not be considered in the final transaction date. when Nathan died, he still owned the property which means his family luckily avoided a huge tax bill on this transaction. This property would be included in his gross estate and needed to file a form 1041 Estates and Trusts return (IRS, 2021).
Yet, Nathan’s family needs to pay a capital gain on the sale of $1,250,000 over $11.7 M ( for 2021).
I would say that the sale occurred after the death of Nathan. It is a fact that the contract was signed before he died however, there was a contingency on the contract. The property had to be rezoned to be able to be used as commercial property. The $40,000 was placed in an escrow account that was refundable if the rezoning was not complete. This made the transaction a revocable transfer meaning that the property, at the time of Nathansâ€™s death, was still subject to the power of Nathan (Raabe et al., 2022). He had the power to make the contract void if the rezoning was not complete. Therefore, when Nathan died, he still owned the property. This property would be included in his gross estate for purposes of calculating estate taxes. The sale of this property would also require the estate to file a Form 1041, U.S. Income Tax Return for Estates and Trusts (IRS, 2021).
Had the sale taken place before Nathanâ€™s death this property would not have been included in Nathanâ€™s gross estate and used to calculate estate taxes. Nathan would have had a capital gain on the sale of $1,250,000 and had to pay taxes on that.
IRS, (2021). Deceased taxpayers â€“ Filing the estate income tax return, form 1041. Retrieved from. https://www.irs.gov/businesses/small-businesses-self-employed/deceased-taxpayers-filing-the-estate-income-tax-return-form-1041
Raabe, W.A., Young, J.C., Nellen, A. & Hoffman Jr., W.H. (2022). Taxation of estates and trusts.