16 Nov If a beneficiary doesn’t pay taxes, do I have to?

Q. As the executrix and beneficiary of an estate, am I responsible to pay taxes on the sale of a home even though someone else’s name was on the deed with rights of survivorship? The house was recently sold for $250,000. I was not the recipient of the house or the money received from the sale of the house. I paid taxes on what I personally received. The IRS wants me to pay taxes from the house and also $9,000 in interest. The seller, who received $250,000, has not yet paid the taxes and the IRS intends to collect it from the estate, of which I am the recipient. I have already paid out $26,000. Now they want $47,000 from the sale of the house. What can I do?
— Executrix

A. You’re in a bit of a pickle.

The executor of an estate is required to marshal the assets, pay the creditors and make distributions.

The IRS and the state are priority creditors of any taxes owed by the decedent and/or the decedent’s estate, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

Every individual is entitled to a federal gift and estate tax exemption of $11.7 million, so we’re assuming you are referencing an income tax liability and not an estate tax liability.

However, when someone dies, the property the decedent owns gets a step-up in basis to the fair market value at the time of death, Romania said.

“If the decedent owned an interest in one-half the property, then only one-half the property obtains the step-up in basis,” she said. “As a result, when the property is sold shortly after death, there is usually little capital gain on the sale of the property to the decedent’s estate.”

In the case of property that is specifically bequeathed, or that passes as a result of joint ownership or rights of survivorship and is then sold by the beneficiary or surviving joint owner, the estate should have no liability for income tax as it did not participate in the sale, Romania said.

It is important that the documentation at the closing, which is filed with the IRS, properly reported the seller, she said.

“Moreover, the gross proceeds were reported to the IRS, thus, if the seller was the estate, it is important that the estate file an income tax return to properly report the actual gain on sale,” she said.

To untangle this confusion, you should consult an accountant or an attorney knowledgeable in estate administration and tax law and who can look at the specifics of your situation.

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This story was originally published on Nov. 16, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.