The house basis acquires the fair market value at the time of death and is sold for profit?”===>Correct; when the property passes to a new owner, through the estate, IRS determines a new basis for the person who inherits it. The tax advantage that someone gets for leaving their heirs property when they die is that the tax basis for the inherited property is the value at their death or alternate valuation date, income tax is completely avoided on the appreciation in value that occurred while they owned the property
“ would this be considered short term capital gains?”===>No; LTCG
“what if it sold for under?”===========>No gain/loss;UNLESS the pty was used as rental/investment pty, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of casualty or theft.SO, you can never take a deduction for a loss on the sale of a personal residence.
Questions:
“1. Besides the final 1040, would we need to file a 1041 to show the sale of the house, repairs, fiduciary fees, and other expenses? income or loss?”====> A 1041 form is an income tax reporting form that an estate /trust(managing the estate) files. The IRS requires the estate or trust manager to file this form each year. With some types of trusts, the income passes through directly to the beneficiaries so the trust or estate doesn't pay any taxes itself, but the trust still has to file an income tax return. fiduciary is in charge of filing Form 1041. The trust must file this form if it has any income tax liability, even if it earns less than $600. The trust must also file Form 1041 if it earns more than $600 in gross income, even if none of this income is subject to trust income taxes; the trust can deduct the payments it makes to beneficiaries from its taxable income, since the beneficiaries will be paying taxes on this income themselves. A trust may also lose money during the year. If the fiduciary does not have to file Form 1041 because the trust lost money, the fiduciary should still file the form anyway. The IRS allows a taxpayer to carry over some types of losses, creating a deduction that the taxpayer can use to reduce tax liability in future years.
“2. Would the beneficiaries receive a K-1 from the 1041? what would be the tax ramifications on this to them? would they need to pay taxes?”=====> The estate or trust then files Sch K-1 of 1041to each beneficiary. Sch K-1 will provide the amount of income, deductions and credits the beneficiary received and must report on your tax return for the year. Form 1041 SchK-1 is filled out and filed with the IRS by the person administering the estate or trust. Sch K-1 is then sent to each beneficiary of the estate or trust so the beneficiary can properly report income taxes. You need to report your share of investment as shown on the Sch K-1 on your individual tax return.for example, if you have interest and dividends on Lines 8 and 9 of your Form 1040.
“3. What kind of state estate form would need to be filed?”===>I guess you need to contact Dept of Rev of WA for sure;
http://dor.wa.gov/Docs/forms/Misc/WA...sfTxRtrn_E.pdf
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