Monthly Archives: August 2023

Positive Change: Rethinking Your Accounting Processes, Goals and Services with QuickBooks

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In my experience, there’s one word that can elicit either thrill and excitement or fear and loathing: CHANGE. Everyone’s reaction to it is different, and we’ve all felt these differing emotions as we’ve experienced major changes in the last few years. It seems as if everything changed (and changed quickly), and during this trying time, we as accountants played a critical role in our clients’ lives and their businesses.

For instance, how many late nights were there working on PPP loan applications? How much time was spent trying to run payrolls and helping our clients navigate the unemployment reporting systems and all the other plethora of small tasks and guidance and support we could provide? And we did all of it while we ourselves were trying to figure out where we were going to set up our home office, where our kids were going to set up their school ‘room’ and where we were going to find toilet paper.

It was exhausting and that was just the external stuff. We all suffered the emotional burden of loss—loss of family members and loss of clients and their businesses.

There’s no denying that change is tough, but I believe it’s also necessary. Now, I know you may be thinking, “We’ve had enough already.” I hear you but my response is, “Let’s keep pushing.” We need to affect positive change not only for ourselves and our businesses but to be of better service to our clients. They need us, and right now, we have a perfect opportunity to rethink our Practice Management mindset, which includes reimagining our processes, our goals and our services—and how we provide them.

And QuickBooks can help.

Practice Management Reset

Take a moment and think about how our practices have changed over the last few years. Prior to the pandemic, my firm did not Zoom or Loom or engage in electronic bill pay or WFH at all. We had started transitioning our clients from QuickBooks Desktop to QuickBooks Online (QBO) in 2015, so thankfully, we were well positioned to be of service with real-time remote accounting services, which was critical in the spring and summer of 2020.

Of course, we still have our “legacy” clients that insist on bringing us their paper check stubs and paper bank statements for us to do our after-the-fact accounting work for them. But we continue to try and promote our real-time accounting services to them, showcasing the benefits of a more involved working relationship with their companies.

When I started at the firm in 2004, everything was after the fact with a deliverable. The clients brought their check stubs, and we re-keyed the data and then provided them with a compilation report that they swiftly threw in a desk drawer and never looked at again unless the bank called and needed it for lending purposes. My background was in the service industry before working at an accounting firm and the whole month-end closing process and the deliverable always seemed like a waste of time to me and of zero value to our clients. Granted, they got what they paid for but was there any value to their operations in that deliverable?

I was not being of service to my clients. I was not helping them achieve their goals for their businesses or their lives. Heck[KL1] , I didn’t even know what their goals were! I only knew how they spent the money that came in. So, I started banging the drum for change, asking:

  •   How can we be of service?
  •   How can we provide real value to our clients?
  •   How can we all win together?

And the answer was transitioning our legacy and QBD clients to QBO.

Changing Minds One Step at a Time with QuickBooks Online

So, how did we go about helping our clients see the value in moving online with QuickBooks? We started small. I transitioned one client from QBD to QBO, spending months learning QBO and how it could benefit our clients and our firm with just that one client. When I was comfortable with the product and felt like I could rely on it, I added another client and so on. But these additions came only from inside our firm. They were books that we maintained, not our clients.

In the fall of 2014, there was a major shift in the accounting services realm with the issuance of SSARS 21. Before then, the lowest level of reporting we issued was Compilation. With the issuance of SSARS 21, we could send out management reports as long as they were a by-product of the accounting software. That industry change along with the conversion to QBO really launched our CAS Department. Now we could be of service in real time.

Fast forward to today and our CAS Department no longer prepares any compilations or higher. That work has shifted to our Audit Department. Our CAS Department focuses on the day-to-day business needs of our clients.

In the fall of 2019, we merged with a local firm that was operating on the paper deliverable and using a DOS based modular accounting system. We folded their employees and clients into our firm, and we were off to the races. Our first order of business was to transition from the legacy software to QBD and then for the clients that were amenable, we migrated them to QBO.

I would love to report that we had 100% buy-in on those changes, but we did not. It’s an ongoing process to try to change hearts and minds. For my colleagues, this change must begin with them constantly thinking, “Is there a better or easier way to do this.” It’s critical that we not get stuck in the “this is the way we have always done it” mindset.

Effective Practice Management Guidelines

So, how do you effectively manage a practice that is growing due to client demand and at the same time ensure that you are giving those clients the best experience possible while keeping your coworkers engaged and invested in the services they provide? For me, it comes down to a quote from Elisabeth Kubler Ros: “There are only two emotions: love and fear….”.

This is not to imply that every day is bliss and that we love all our clients every day. That’s not realistic, but living without fear—fear of change, fear of chaos, fear of loss—is a goal that can be chipped away at every day. For example, if you’re comfortable with the status quo, hire or promote from within someone who isn’t. In other words, if you cannot be the agent of change, find someone who can be that for you.

Keep in mind as you chip away at the fear of change that change doesn’t happen quickly. For us, it’s been a nearly 20-year journey, and we continue to grow and look for change every day. Change does not have to be chaos. For it to be effective, I would argue that it must be a well thought out, well designed and step-by-step process. And you must be able to think, re-think and retool everything.

Moving Forward with QuickBooks Online

If I have any advice as you move forward with change, it’s start small, scale up and utilize the many capabilities of QuickBooks Online. Right now, in 2023, we find ourselves in a period of tremendous application capability, expansion and machine learning. So many new tools are available to help us be of better service to our clients and increase our productivity, which in turn grows our own businesses and gives us more opportunities professionally and personally.

We are truly in a win-win environment, and it is only through change that growth is possible!

**This is a paid partnership with Intuit.

Things To Consider When Starting a Business

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Article Highlights:

Start Off on the Right Foot
Sole Proprietor
Partnership
Joint Venture
C-Corporationo Qualified Small Business Stocko Section 1244 Election
S-Corporation
Limited Liability Company

When you are starting a business there are several possible business entity types that need be considered to make sure you get started off on the right foot and avoid costly mistakes that must be corrected later or those that must be changed later to maximize tax benefits. One also needs to be concerned about potential personal liability.
Each business entity choice has its own pros and cons; the following is an overview of each possible business structure.

Sole Proprietor – This is generally the most basic business entity. It is a single owner entity, and for tax purposes the owner reports the business’ income and expenses as part of their individual tax return, using the 1040 Schedule C. This is simpler than for other business entities where income and expenses must be reported on a separately filed business return. However, that does not mean a sole proprietor cannot have employees and retirement plans like other business entities and qualify for some of the same tax credits and business deductions available to other business entities. The sole proprietor pays income taxes on any net profit from the business, as well as self-employment tax (Social Security and Medicare taxes).
Partnership – A partnership is a business entity with two or more owners with equal or different ownership interests in the business. The net profit or loss from such an entity is computed on Form 1065, and the profit or loss and other tax attributes are passed through to the partners on Schedule 1065 K-1 and included on their individual 1040 returns. Like a sole proprietor except the net profit and loss is determined at the partnership level and each partner’s proportionate share is passed through to them via the K-1. The major difference being a partnership agreement is required to establish business policies and how partnership funds are spent. Partners are also personally responsible for all the liabilities incurred by any of the partners. Partners who perform work for the partnership are not considered employees, and therefore, will be responsible for paying income and self-employment taxes on their share of the profits.
Joint Venture – Occasionally, a married couple may be in business together. Spouses who file a joint return may elect out of the partnership rules. Thus, when the election is made, a joint venture between them is not treated as a partnership for tax purposes. All items of income, gain, loss, deduction, and credit are divided between the spouses according to their respective interests in the venture, and each spouse considers their respective share of these items as if they were attributable to a trade or business conducted by the spouse as a sole proprietor. Accordingly, each electing spouse will report their shares on Schedule C.
This rule does not apply to spouses who operate in the name of a state law entity (including a general or limited partnership or a limited liability company). The election can be made only for a business operated by spouses as co-owners that is, or should otherwise be, taxed as a partnership (whether there is a formal partnership). Both spouses must materially participate in the trade or business.
C-Corporation -A c-corporation is a legal entity that is separate and distinct from its owners. Under the law, corporations possess many of the same rights and responsibilities as individuals. They can enter contracts, loan and borrow money, sue and be sued, hire employees, and own assets. Domestic corporations in existence for any part of a tax year must file a federal income tax return – generally Form 1120 – even if they do not have taxable income. Unlike some other business entities corporations pay taxes on their profits. Shareholders profit through dividends and stock appreciation but are not personally liable for the company’s debts. This can result in double taxation since dividends paid are not deductible by the corporation, thus taxable at the corporate level and taxable to the shareholder. Shareholders who perform work for the corporation are considered employees.
o Qualified Small Business Stock – One big benefit for smaller C-corporations is the ability for shareholders to exclude up to $10 million from the sale of stock that meets a five-year holding period and the definition of a qualified small business stock.o Section 1244 Election – C-corporations can also make what is called a Sec. 1244 election which allows an ordinary loss (Form 4797) on the sale of stock from a domestic corporation of up to $50,000 annually ($100,000 on a joint return, even if the stock is only owned by one of the spouses), even though the loss would otherwise be treated as a capital loss. Gains still qualify as capital gains. There are several requirements to qualify for this treatment one of which is the stock must be purchased from the corporation.

S Corporation – An S corporation is a corporation that makes an election to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes thus avoiding the double taxation issue discussed previously. Form 1120-S is the federal tax return required to be filed by S corporations, and Schedule 1120-S K-1 is used to report each shareholder’s portion of the income/loss, deductions, and credits. Just because an S corporation is a pass-through entity, it does not mean the income can all be passed through to a working shareholder and escape payroll taxes. Working shareholders are required to take reasonable compensation which is reported on Form W-2 (wages).
o S-Election – The election by a corporation or other entity eligible to be treated as a corporation, must be made no more than 2 months and 15 days after the beginning of the tax year for which the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect. If the election was not made within the 2 months and 15 days prescribed to make the election, then a late election is available if certain conditions are met.

Limited Liability Company (LLC) – A Limited Liability Company (LLC) is a form of state business entity. The IRS did not create a new tax classification for the LLC when LLCs were created by the states; instead, IRS uses existing tax entity classifications: C or S corporation, partnership, or sole proprietor (the latter also being termed a disregarded entity). For federal purposes an LLC is always classified by the IRS as one of these types of entities. Regulation of LLCs varies from state to state. The profits, losses, and tax credits from an LLC are passed through to its members (LLC owners are called members, not shareholders), who report them on their individual tax returns. As the name implies, an LLC provides the same liability protection to its members as a corporation does to its shareholders.

While you might be tempted to determine the right business entity on your own, we strongly encourage you to consult with this office and your legal counsel. The foregoing is only an overview of the possible entity selection and there are a considerable number of issues to consider.

Planning for Your Retirement – New Wrinkles from the SECURE 2.0 Act

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Article Highlights:

SECURE 2.0 Act
Catch-up Contributions
Incentives to Contribute to a Plan
Long-term Part-time Workers
Automatic Enrollment
Required Minimum Distributions
RMD Penalties
Emergency Savings Accounts
Penalty-Free Withdrawals
Other Distribution Changes

In 2019 Congress passed legislation named the Setting Every Community Up for Retirement Enhancement Act – shortened to the SECURE Act – that included a number of retirement plan changes and enhancements. In late December, 2022, the SECURE 2.0 Act was passed and signed by President Biden. Many of the provisions of SECURE 2.0 were designed to encourage more Americans to save more for their retirement years and make it easier to do so. Some of these changes could impact your retirement plan strategy. Here are some of the highlights of SECURE 2.0:
Contributions to IRAs and Other Plans
Some of the law changes that are meant to encourage more workers to save for retirement include:
Catch-up contributions – Employees age 50 and older are allowed to make additional pre-tax contributions to their 401(k) plans over the regular annual limit. Referred to as ‘catch-up’ contributions, the idea is to get older workers to build up their retirement accounts in their last few years of working. The catch-up amount originally started out many years ago at $1,000, but has grown with annual inflation adjustments to $7,500 for 2023. Starting in 2025, for plan participants age 60 to 63, the catch-up amount increases to at least $10,000 per year and will be inflation-adjusted after 2025.
The amount of the catch-up contribution IRA owners age 50 and over can make has long been $1,000 per year. Starting in 2024, the $1,000 will be indexed for inflation in $100 increments.
Under SECURE 2.0 employers can revise their retirement plans so that employees can choose to have employer-matching and catch-up contributions go into a Roth-style plan with after-tax contributions. Historically, the matching and catch-up contributions have only been allowed as pre-tax contributions. However, starting in 2024, plan participants making more than $145,000 per year from the employer sponsoring the plan can only have their catch-up contributions and the employer-matching amounts go into the employer’s Roth plan. With Roth contributions there is no tax deduction or tax-free wages benefit, but withdrawals from the Roth plan, including investment gains, are tax-free once the account owner reaches age 59½ and has had the plan for at least 5 years.
Financial incentives to contribute to a plan – As noted above, employers can provide matching contributions as a long-term incentive for employees to contribute to a 401(k) plan. However, immediate financial incentives (like gift cards in small amounts) have been prohibited even though individuals may be especially motivated by them to join their employers’ retirement plans. SECURE 2.0 enables employers to now offer de minimis financial incentives, not paid for with plan assets, such as low-dollar gift cards, to boost employee participation in workplace retirement plans.
Long-term part-time workers –The original SECURE Act required employers to allow long-term, part-time workers to participate in the employers’ 401(k) plans. Except in the case of collectively bargained plans, employers maintaining a 401(k) plan have had a dual eligibility requirement under which an employee must complete:

1 year of service (working at least 1,000 hours) or
3 consecutive years of service (where the employee completes at least 500 hours of service).

Starting in 2025, SECURE 2.0 reduces the 3-year rule to 2 years, disregards pre-2021 service for vesting purposes, and extends the long-term part-time coverage rules to 403(b) plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA). These plans are generally provided by governments or tax-exempt organizations and are sometimes known as ‘tax-sheltered annuities.’
Automatic enrollment required – Most employees under-save for their retirement. Some don’t participate at all in their employer’s plan. To encourage greater participation, effective for plan years beginning after 2024, SECURE 2.0 requires 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible, although employees may opt out of coverage. The initial auto-enrollment amount is at least 3% but not more than 10% of an employee’s compensation. Each year thereafter that amount is increased by 1% until it reaches at least 10%, but not more than 15%.
All 401(k) and 403(b) plans in existence before December 29,2022 are not required to have automatic enrollment, but some of these employers may want to do so anyway, or may have already established auto-enrollment arrangements. Also exempt from mandatory enrollment are small businesses with 10 or fewer employees; SIMPLE Plans; employers that have been in business for less than three years; and church and government plans.
Distributions from IRAs and Retirement Plans
The SECURE 2.0 Act made significant changes to when distributions must or may be made from retirement plans, including the following:
Required Minimum Distributions (RMD) – While some individuals would prefer to keep their tax-advantaged contributions to retirement plans and traditional IRAs growing until their death so that more money goes to their heirs, Congress doesn’t see it that way and requires distributions to be made. As far back as the 1960s distributions had to be made once the account owner reached age 70½, but the SECURE Act extended the age to 72, and SECURE 2.0 changes it again, to 73 as of 2023. But the language of the SECURE 2.0 bill is a bit awkward and can be interpreted that because someone who turned 72 in 2022 was required to take a 2022 distribution, the fact that they turn 73 in 2023 doesn’t let them claw back the 2022 distribution already made or skip a 2023 distribution. So, unless the wording of the tax code is changed in a technical corrections bill, just those who turn 72 in 2023 will be excused from being required to take a 2023 distribution. Starting in 2033 the distribution beginning age increases to 75.
Regardless of the required beginning date, if a taxpayer so chooses, he or she can delay the first year’s RMD until the second year, thus making the distribution includible in the second year’s tax return. This is sometimes desirable if the taxpayer has substantial wages or other income in the year the mandatory distribution age is reached and expects less income the next year. In this situation, by delaying the distribution to the second year the tax bracket could be substantially lower. If the taxpayer chooses that option, then:

The first year RMD must be taken by April 1 of the following year, and
The taxpayer must also take the second year RMD distribution by December 31 of year two, thus doubling up the distributions in year two.

RMD Penalties – Existing law sets the formula for computing the minimum amount that must be withdrawn once the required beginning age is reached, and to enforce the requirement, there has been an egregious excise tax (commonly referred to as a penalty) of 50% of the amount that should have been withdrawn and wasn’t.
SECURE 2.0 reduces the excise tax for failure to take required minimum distributions from 50% to 25%, starting for 2023. If a failure to take an RMD from an IRA is corrected in a timely manner, the 25% penalty rate is reduced to 10%.Timely means submitting a corrected return either in the second year after the RMD was missed or before the IRS assesses a penalty, whichever comes first.
Prior to SECURE 2.0, IRS offered administrative relief from the penalty for those who failed to take their RMD whereby the taxpayer could file a request for relief using IRS Form 5329 along with an explanation why the correct amount of distribution wasn’t made. Generally, the IRS would waive the penalty if the taxpayer had immediately taken steps to rectify the shortfall once it was discovered and had a reasonable excuse for why the RMD hadn’t been made. Reasonable excuses included health problems, a death in the family, confusion about the rules, or receiving erroneous advice from an investment advisor or tax professional. There is no language in SECURE 2.0 that removes this method for eliminating the penalty, but the IRS may not be as inclined to waive the penalty as in the past now that the penalty is lowered to 10%.
Emergency Savings Accounts – Though individuals can save on their own, far too many fail to do so. According to a report by the Federal Reserve, almost half of Americans would struggle to cover an unexpected $400 expense. Many are forced to dip into their retirement savings. A recent study found that, in the past year, almost 60% of retirement account participants who lack emergency savings tapped into their long-term retirement savings, compared to only 9% of those who had at least a month of emergency savings on hand.
Congress decided that separating emergency savings from a person’s retirement savings account will provide participants a better understanding that one account is for short-term emergency needs and the other is for long-term retirement savings, thus empowering employees to handle unexpected financial shocks without jeopardizing their long-term financial security in retirement through emergency hardship withdrawals.
To that end, SECURE 2.0 provides employers the option to offer retirement plan-linked emergency savings accounts to their non-highly compensated employees. Employers will need to amend their plans before they can offer these accounts. Some of the details:

Employers may automatically opt employees into these accounts at no more than 3% of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer).
Once the cap is reached, the additional contributions can be directed to the employee’s Roth defined contribution plan or stopped until the balance attributable to contributions falls below the cap.
Contributions are made on a Roth-like basis and are treated as elective deferrals for purposes of retirement matching contributions with an annual matching cap set at the maximum account balance – i.e., $2,500, or lower as set by the plan sponsor.
The first four withdrawals from the account each plan year may not be subject to any fees or charges. At separation from service, employees may take their emergency savings accounts as cash or roll it into their Roth defined contribution plan or IRA.

Penalty-Free Withdrawals – Domestic Abuse – A domestic abuse survivor may need to access his or her money in their IRA or retirement account for various reasons, such as escaping an unsafe situation. SECURE 2.0 allows retirement plans to permit participants that self-certify that they experienced domestic abuse to withdraw a small amount of money that will not be subject to the 10% early withdrawal penalty that applies to plan withdrawals prior to age 59½. These withdrawals cannot exceed the lesser of $10,000, or 50% of the present value of the nonforfeitable accrued benefit of the employee under the plan. To be eligible, the distribution must be made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner.
Domestic abuse means physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently including by means of abuse of the victim’s child or another family member living in the household.
While the early withdrawal penalty won’t apply to domestic abuse distributions, regular tax does apply. However, the domestic abuse survivor may redeposit the amount that was withdrawn into their IRA or the employer’s plan at any time up to 3 years after the date on which the distribution was received, and then file an amended return to recover the tax that was previously paid on the distribution.
Other distribution rules changes – The penalty when an individual takes an early distribution (before age 59½) from their traditional IRA or employer’s plan is 10% of the amount withdrawn. There are many exceptions to the penalty and SECURE 2.0 added some new ones in addition to those already on the books. Briefly these new exceptions include:

Individuals in federally declared disaster areas can now withdraw up to $22,000 from an IRA or retirement plan with no penalty. The tax on the distribution can be paid over 3 years.
As of 2023, an employee who has been certified by a physician as being terminally ill and who presents evidence of that diagnosis to the plan administrator can make a penalty-free withdrawal from their retirement plan.
As of December 30, 2025, penalty-free distributions up to $2,500 can be made to cover long-term care expenses.

The SECURE 2.0 Act changes discussed in this article are only a few of the more than 90 provisions in the Act that affect retirement plan participants and employers offering the plans over the next few years. If you have questions about how your retirement contributions and distributions – and your overall strategy for a comfortable retirement – will be impacted, please contact this office.

Taxation and Sales of Inherited Property Get Beneficial Treatment

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Article Highlights:

Taxation of Inherited Property
Inherited Basis

Date of Death Value
Alternate Valuation Date
Joint Tenants
Married

Gain or Loss on Sale
Certified Appraisals
Deducting Loss on Sale of Inherited Home

If you are the recent beneficiary of an inheritance, you may be wondering if you will need to pay tax on the cash, stocks or real property that you received. Generally, the answer is no, and you don’t even need to report the receipt of the inheritance on your income tax return. But there is an exception: if you receive untaxed income that a decedent had earned or had a right to receive during their lifetime, you’ll be taxed on it just as the decedent would have been. Examples of this type of income are payments of compensation, wages, bonuses, commissions, vacation and sick pay that the decedent had earned but hadn’t received before they died; uncollected rent; installment payments from property sold before the decedent’s death; and most frequently, traditional IRA distributions.
Another situation you may be concerned about is what happens if you sell the inherited property, particularly if it had been the decedent’s personal residence. After all, the property may have been purchased years ago at a low cost by the deceased person but may now have vastly appreciated in value. The usual question is: ‘Won’t the taxes at sale be horrendous?’
You may be pleasantly surprised by the answer—special rules apply to figure the tax on the sale of any inherited property. Instead of having to start with the decedent’s original purchase price to determine gain or loss, the law allows taxpayers to use the value at the date of the decedent’s death (the inherited basis) as a starting point. This is commonly termed a ‘stepped up’ basis, but it would be a ‘stepped down’ basis if the value at the date of death is less than the decedent’s basis.
Sometimes the executor of the decedent’s estate can elect to use the value at an alternate date (usually 6 months after the date of death) but this is rare, as it can only be used to lower the estate tax. Currently, the value of the decedent’s entire estate would need to exceed nearly $13 million ($26 million if married) before estate tax might be owed. About 6,200 estate tax returns were filed in 2021, and of those only around 2,500 had a tax liability. So, the chance that the alternate valuation date method will apply is very low, and the date of death value will be used in nearly all cases.
Determining basis gets a little tricky when the decedent wasn’t the sole owner of the property. For example, in the case of unmarried joint tenants, when the first joint tenant dies, the presumption is that the entire value of a joint tenancy asset is included in the decedent’s estate. However, this is not the case if the surviving joint tenant can prove what amount he or she contributed toward purchasing the property. Then the surviving joint tenant’s basis is only increased by an amount equal to the amount included in the decedent’s estate (even when no estate tax return was required to be filed). The surviving tenant’s original basis (reduced for business or rental property by any depreciation or depletion claimed by the surviving joint tenant) is added to the value of the property that was included in the decedent’s estate.
For married taxpayers, where a property is held as separate property by one of the spouses and inherited by the other spouse, the basis in the hands of the inheriting spouse will be fair market value of the entire property at the deceased spouse’s date of death. Where a property is jointly owned (not community property) by both spouses and one spouse passes away, the surviving spouse already owns 50% and only inherits the deceased spouse’s 50%. Thus, the surviving spouse’s basis in the inherited portion will be 50% of the property’s fair market value when the deceased spouse died plus 50% of the joint basis.
If married taxpayers reside in a community property state and hold the property as community property, when one of the spouses dies, the surviving spouse’s basis becomes 100% of the fair market value at the deceased spouse’s date of death. For inherited community property used in business or a rental, no adjustment is required for prior depreciation claimed, and the depreciation of the inherited basis begins anew.
Often the selling price and the date of death value of the property are practically identical, and there is little, if any, gain to report. If there is gain, it receives long-term capital gain treatment, regardless of how long the decedent owned the property or how long the beneficiary retains the property before it is sold. The advantage here is that long-term capital gains are taxed at rates of 0%, 15% or 20%, depending on the individual’s adjusted gross income and if lower than their regular rate.
The sale of inherited property may result in a loss, particularly when it comes to real property such as the decedent’s personal residence on which large selling expenses (realtor commissions, etc.) must be paid.
Thus, it is important to have a certified appraisal of the home or other real property to establish the home’s tax basis on the date of death. If an estate tax return or probate is required, a certified appraisal should be completed as part of those processes. Otherwise, one must be obtained to establish the basis. It is generally not acceptable just to refer to a real estate agent’s estimation of value or comparable sale prices if the IRS questions the date of death value. The few hundred dollars it may cost for a certified appraisal will be worth it if the IRS asks for proof of the basis.
While the sale at a loss of inherited stock is unquestionably allowed (within the limits noted at the end of this paragraph), is a loss on an inherited home deductible? Normally, losses on the sale of personal use property, including one’s home, are not deductible. However, unless the beneficiary is living in the home, the home becomes investment property in the hands of the beneficiary, and a loss is deductible but subject to a $3,000 ($1,500 if married and filing separately) per year limitation for all capital losses with any unused losses carried forward to a future year.
In some cases, courts have allowed deductions for losses on an inherited home if the beneficiary also lives in the home. In order to deduct such a loss, a beneficiary must try to sell or rent the property immediately following the decedent’s death. In one case, where a beneficiary was also living in the house with the decedent at the time of death, loss on a sale was still deductible, when the heir moved out of the home within a ‘reasonable time’ and immediately attempted to sell or rent it.
If the home is sold by the decedent’s estate (or trust, if applicable), rather than title passing to the beneficiary who then sells the property, the transaction will be reported on the estate’s (or trust’s) income tax return, and if there is a loss on the sale, that loss will be used to offset other income of the estate (or trust), with any excess loss passed through to the beneficiary on a Form 1041 Schedule K-1, generally in the final year of the estate (or trust). In this situation, the executor (or trustee) will be responsible for making sure the appropriate basis has been used in computing the gain or loss.
If you have questions related to inheritances or home sales, please give this office a call.

Posted in Tax