Ed Camby sold an apartment building in May 2008 for a small amount of cash and a note payable over five years. Principal and interest payments are due annually on the note in April of 2009 through 2013. Ed died in August 2008. He willed all his assets to his daughter Anna. Ed's gross estate is about $3 million, and his estate tax deductions are very small. What tax issues should the executor of

Question

his estate consider with respect to reporting the sale of the building and the collection of the installments?

What will be an ideal response?

Answer 1

• When and where will the gain on the sale of the building be reported?
• Will there be any income in respect of a decedent (IRD)?
• If there will be IRD, will there be a 691(c) deduction?

Unless Ed's executor elects on Ed's final individual return (for 2008) not to use installment reporting for the gain, the portion of the gain attributable to the down payment will be reported on Ed's 2008 individual return, and the remaining gain will be reported on the estate's income tax returns when the principal is collected. The estate need not use a calendar year. If the estate terminates prior to collecting all of the principal, Anna will report the remaining gain as she collects the principal. If the executor elects out of installment reporting, all the gain will be reported on Ed's 2008 return. This election would be a favorable option if Ed has losses that the gain would offset because the losses would otherwise "die" with Ed.

The gain inherent in the principal payments on the note will be IRD unless the executor elects out of installment reporting. No step-up in basis is allowed for IRD items.

Ed's estate will owe estate taxes, and a 691(c) deduction will be allowed for the estate taxes attributable to the gain inherent in the note included in the gross estate.