1041 for Estate- Rental Prior to Sale- Depreciate? Gain/Loss Classification?

[TaxGirl3]

Former residence of deceased is being rented for 3 months to the buyer prior to the sale.... and the 3 month rental spans 2 (fiscal) tax years.  Is the property therefore depreciated?  Does this rental change the property from investment (capital gain or loss on sale) to rental (capital gain or ordinary loss on sale)?  Thank you!

[TaxGuyBill · Accepted solution]

Yes, it would be depreciated.  Actually, even if it was in the same tax year, I've found no basis that 1250 property should not be depreciated.

Yes, as a rental, I would report the sale on 4797, which could potentially change how it is taxed.

[BobKamman]

If there was a rental to Tenant A followed by a sale to Buyer B, I would treat it as a rental and claim depreciation and other expenses against that income.  But when Tenant A and Buyer A are the same person, I would want to know more.  Was the lease and the purchase all part of the same contract?  Was there a reason to let the buyer move in before closing (related parties, perhaps)?  

The sale will probably show a loss because of selling expenses and if shown on Part II of Form 4797, flow straight through to the 1041.  Does that make a difference on the Schedules K-1, especially if it's not a final-year return?  If it makes a difference, does that help or hurt the beneficiaries (not that it should matter if you're just trying to do the right thing).  If it doesn't make a difference, why complicate the return?