united-states trusts-and-estates tax-law
Inherited house and principal residence exclusion for capital gains on IRS Form 104
<p>I'm the personal representative of an estate in Massachusetts.  A home in probate was recently sold and the estate received a 1099-S.  There are about $50,000 in capital gains from the sale.  I lived in the house for over 2 years after the death of the owner.  Is the estate able to use the principal residence exclusion for the capital gains on IRS Form 104?  There are 5 heirs.</p>

<p>The basis for real estate owned by a decedent in the U.S. (i.e. the number you subtract from the net proceeds to determine capital gain) is adjusted to fair market value as of the date of death, regardless of the purchase price, the capital improvements made, or depreciation deductions taken (which is how the basis would have been determined prior to death).</p>
<p>So, only appreciation from the date of death to the date of sale is taxable as a capital gain. (That appreciation s taxable income to the estate subject to a distributable net income deduction that could pass a portion determined by law and regulations of the tax due to an heir via a K-1.)</p>
<p>To qualify for the principal residence exclusion you need to both own the property of record for two of the five years preceding the sale, and must reside there for two of the five years preceding the sale, but they need not be the same two year periods and don't even have to overlap. But, this would probably be interpreted to only include the time period after the date of death through the sale.</p>
<p>Since the estate rather than you personally owned the residence for the entire time period from the death until the sale and you are not the sole heir, the principal residence exclusion would not apply.</p>
