How to report sale of home exclusion for surviving spouse

[Asia]

The sale of home is being reported on the 1041 Estate tax return. After applying the step up basis there is a 344K gain which will show on the surviving spouse’s K1. Both spouses lived in the house and would qualify for the primary residence exclusion. The house was sold less than 2 years after the date of death, so the surviving spouse also qualifies for the entire 500K exclusion.

I’ve played with the SOH worksheet on the 1040 but can’t seem to link it to the K1 capital gain on the individual tax return.

How should this be reported? Does it get indicated on the 1041 K1 or how would I best manipulate the 1040?

[TaxGuyBill]

My first comment is to back up a bit and ask if it should even be on the 1041.  Many home are owned as Joint Tenants with Rights of Survivorship (JTWROS), in which case the living spouse would own the entire home after the death of the spouse (and therefore the entire sale would be reported on the 1040 of the surviving spouse, and nothing on a 1041).

What circumstances are there that the sale is being reported on the 1041?  Is the entire sale being reported on the 1041, or only half?

[BobKamman]

But many homes are owned in a revocable living trust.  Many of these trusts were written back in the time when there was no portability of the spouse's exclusion, so they provided "when the first dies, split the trust into two new trusts, and one is irrevocable."  Some of them would provide, "but don't put the primary residence into that trust, because of adverse tax consequences."  Meanwhile, others just have cookie-cutter boilerplate verbiage that results in problems like this.  

So, first question, who owned the house?  A trust?  What does the trust say about what happens when the first spouse dies?  How did you determine the stepped-up basis of the house?  Did its value increase in the "less than two years" from death to sale?  

[IRonMaN]

Curiosity sometimes gets the best of me so I'm just curious as to how much the house is worth if it went up 344K in less than two years.  

[Asia]

There is a need for the 1041 as they had more assets than just the sale of prime rez and the sale was ran throught the estate

[Asia]

This is not a trust. Its an estate. All assests went through probate and were sold though the estate.

[Asia]

It and the adjacent lot was appraised at 1,082,000 and sold a year later for 1,577,578. There are closing costs/commisions etc. that brings it down to 344k

[Asia]

I ended up making an informational note on line 14 of the k1indicating how much of the capital gain applies to the exclusion... I have not processed the return so I'd like to hear if anyone has other solutions in mind. Still working on the 1040 end of it

[TaxGuyBill]

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@Asia wrote:

There is a need for the 1041 ... the sale was ran throught the estate

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What I'm getting at is you may want to verify who owned the property before death and how was the title held.  Your comments seem to indicate the deceased person was the SOLE owner (the estate is reporting the entire sale), and the spouse was not an owner at all. In my area that is unusual. 

[IRonMaN]

A year later the property appreciated 50%?  Have properties in that area actually increased that much or was it not such a good appraisal?

[Asia]

Both spouses owned and are qualified for the exclusion. Can anyone answer this question? 

[Asia]

This house is located in Seattle WA... That's how it is around here. I have the documents from the apprasial. Even if it's not "good" as you questioned, it's what I have and I'm, sure the IRS won't mind it was low instead of too high... 

Can anyone answer my actual question please?

[BobKamman]

 Getting back to my first question, who owned the house?  Just John Smith?  Or John and Mary Smith, but not as joint tenants, so the estate owned half and Mary owned the other half?  Was Mary the administrator of the estate, so she signed the deed and the closing statement shows she was selling both the estate's half and her own half?  

In any case, as @IRonMaN suggests the appraisal doesn't seem reliable.  Why the sudden increase in value?  And then you mention the "adjacent lot."  How many acres are we talking about here?  Does the entire property qualify as a primary residence, if Mary owned and lived in the house located on a part of it?

[BobKamman]

If both spouses owned the property, why are you reporting the entire sale on the 1041?  Obviously it was not in joint tenancy, or the surviving spouse would be the seller.  So that leaves the estate owning half and the survivor owning half.  Was the surviving spouse also the personal representative of the estate?  She might have signed the deed in two capacities, because you are telling us that there are two sellers.  

[BobKamman]

According to one report from January 2025, this is just the way it is around Seattle:

According to the latest data from Zillow, the median home value in Seattle is currently $850,864, which is 3.7% higher than January 2024. And for the Seattle-Tacoma-Bellevue metropolitan area, the median home price was around $735,683 in January 2025. Their estimate was 4.9% higher than a year earlier.

[Asia]

They both owned and lived in the house. Adjacent lots to the prime rez qualify for the exclusion as well, they both owned that lot as well. We live in a community proprty state. Size of acres is irrelavent. Seattle's housing market is crazy.

If you can not answer my question please stop replying

[BobKamman]

I'm, sure the IRS won't mind it was low instead of too high

Who is your client?  The IRS or the surviving spouse?  

[Asia]

What's your problem? I have the appraisel and I have the settlment statement for the sale. They are valid documents.

[Asia]

The exclusion wipes out the gain. My client won't be paying tax on the sale. If I get audited I need to be able to produce documents to back up my numbers. 

[BobKamman]

How is the seller identified on the closing statement?  The surviving spouse?  The personal representative of the estate? Both?

Your problem is that your facts contradict your choice to put the entire sale on an estate 1041.   

[Asia]

She is identified as the personal rep of the estate. She is however the surving spouse. The IRS will get a 1099S in the name of the estate. .. 

For the sake of argument - even if only half of the prime rez should be reported on the estate, my inital question is still relavent becuase she should be able to exclude her hubby's half of the gain.

If you can't answer the question stop responding Bob

[Asia]

Listen, my client is listed as a seller as well as the estate on the county records. However on the closing docs the entire property was sold via the estate and 1099S is reported under the estate. I can not change these facts. The sale applies to their prime rez and I'm asking how best to document that.

I'm not here to argue about the amount of the appraisal or if the new owners only own half.

Good day Bob

[BobKamman]

Listen, the fact that they lived in a community property state is irrelevant.  [Removed]  I live in one too, and have clients in Washington.  What is relevant is that Washington has an estate tax, which is an incentive for friendly appraisers to low-ball a figure.  Was that appraisal used for a state estate tax return?  Did a low number save taxes?  Did it take into account that there were two owners, the decedent and the surviving spouse, and use that as a reason to lower the FMV?  Which do you think IRS will recognize:  A low-ball appraisal, or an actual sale within a year of death?  (Maybe subtract 10%, when property values have been increasing 5% a year.)  You still have a loss after selling expenses.  

The escrow company is issuing only one 1099-S, when the law requires them to issue two?  Did this sale occur in 2025, so the 1099-S has not yet been issued?  Or no one bothered to ask them for a corrected one?  How professional is that?  Sounds kind of conspiratorial, doesn't it?  

[Asia]

The entire sale of the estate is under the WA DOR exclusion amount for estate tax - no body is low balling or conspiring. 

I feel a year is a little long to be assuming basis based off sale price. 

proseries has limitations so that is why I used the word manipulate.

is asking for a corrected 1099s from 2023 the best advice?  And not using court filed appraisals? Wild

[qbteachmt]

From the beginning, you state surviving spouse. But you never directly answered if this spouse was listed on the deed as an owner, owner with right of survivorship (and therefore inherited), or tenants in common. So, that's one choice of three that makes a difference, both for basis and for gain.

Example: If the spouse was joint owner, and with right of survivorship, then she owned 100% of the property after the date of death.

"The house was sold less than 2 years after the date of death, so the surviving spouse also qualifies for the entire 500K exclusion."

Yes, that's a Federal tax provision. That doesn't affect real estate ownership. That long after death, the house would have been owned by a person who was not dead. There is no estate for the sale of the house. The surviving spouse owned and sold the house. It should all be on her taxes and reported by her.

Whoever gave the guidance to the listing and the sale apparently did it wrong.

[Asia]

Thank you for your reply. My client did share ownership, sorry I thought I had covered that. The appraisals that were filed in court show the full value of the properties and then half the amount as the estates value so her ownership and half value is documented there as well. An additional parcel not previously discussed was included in the sale with a partial additional heir. Maybe that is why it was listed this way. My client was the executor and only other heir. 

Even though the appraisals show half the value to the estate, the sale shown on the settlement statement shows the entire value and that’s how it was filed on the 1099S

[qbteachmt]

"My client did share ownership"

This is the surviving spouse? How is she listed on the title? How did she "share" ownership?

Once the other owner died, the surviving owner(s) inherit, unless the property was in a trust. This is why the title/deed matters.

"The appraisals that were filed in court show the full value of the properties and then half the amount as the estates value"

Why is the estate involved at all? The estate never finished all the inheritance and transfers?

"so her ownership and half value is documented there as well."

The other half is what is confusing. Which State is this, and what is listed on the title? It's that basic of an issue.

"An additional parcel not previously discussed"

Which has its own deed, or not? If so, what's listed on the title?

Real property is owned by Deed. The Deed overrides any will or estate, because it establishes ownership all by itself.

"was included in the sale with a partial additional heir."

Partial heir or someone inherited or it was co-owned? Your terminology isn't standard to the issues and details. How did the deceased own this parcel, who else was on the deed, how are the name(s) listed?

"Maybe that is why it was listed this way. My client was the executor and only other heir."

That's a Will. That has nothing to do with Deeded property unless there is no owner available after the death of the deceased owner. Property only falls through to Estate probate because it wasn't addressed via the title/deed, via a Transfer on Death deed (if this State allows that). and is essentially orphaned.

Otherwise, was the Estate and will handled after death?

"Even though the appraisals show half the value to the estate"

An estate can't sell something it doesn't own. If the property legally transferred to the other spouse At Death of the first spouse, there is no property held by the estate.

"the sale shown on the settlement statement shows the entire value and that’s how it was filed on the 1099S"

Is there an Estate EIN on the 1099-S or the dead spouse's SSN?

Who guided the spouse through this? Who helped put the house up for sale?

[BobKamman]

So now we have a primary residence that goes to the surviving spouse; an adjacent lot that qualifies as part of the primary residence; and an additional parcel involving another heir (maybe a stepchild of the surviving spouse) that may or may not be that additional parcel.

I would check to make sure the appraisal covered everything, not just the primary residence on its own lot. If that was worth $1 million, and the total sale was $1.3 million, an additional parcel would explain the difference, not appreciation in less than a year after death.

If the estate isn’t closed (the tax returns haven’t been done, what else is pending?) and this is not a final return, how do you distribute capital gains to anyone, on a K-1?

I don’t know of any authority for claiming Section 121 on a 1041. All the gain came after death; the purpose of Section 121 is to exclude gains while people live in their home. I suppose you could try, and attach a Form 8275 disclosure statement.

In any case, tax is assessed on income and not on pieces of paper. The name and TIN on the incorrect 1099-S is irrelevant. The surviving spouse reports half the transaction directly on a 1040. That half qualifies for the exclusion.

Problem could have been avoided if the estate had distributed the property to the survivor before it was sold. But with other parcels and other heirs involved, maybe there was a negotiated settlement with other factors that prevented this. Messy estates often result in messy tax returns.