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Sunday, August 2, 2020

Can an executor rent out an estate property when the sales market is slow?

Are you an executor trying to sell an estate property in a market that just isn't moving right now? You're not alone. This reader is in the same situation. Here is his question and my comments:
 
"I am the executor on my fathers estate and am trying to sell his home, but the current Covid market is challenging. Can I legally rent out the home for a year, putting all income into the estate account? And will this income be considered capital gains for me, or will it just be income for the estate? Another side question: how soon after probate must I close out and dispense the assets? Could one keep the house rented for 5 years and put all income into the estate? I want to avoid putting the house in my name to keep from paying capital gains on a second home. Our goal Is to sell the house soon."

You're right that the current market is challenging. I've heard from several executors that they are considering renting out an estate property after efforts to sell it have not worked out. 

The short answer is yes, as an executor you can decide to rent out the estate property. And yes, the income would go into an estate account for the upkeep of the home. From that account, you would pay property taxes, insurance, and repairs/maintenance. Keep an eye on costs because if it costs more to rent it than you are bringing in as income, renting is probably not the best option. Depending on amounts and circumstances, you could also make periodic payments to beneficiaries from the rental income.

I assume that at this point, the property is still in your father's name or in the name of the estate. It sounds as though you are going to be the only beneficiary of the house, but that's just an assumption based on your language and questions. Keep in  mind that if the property increases in value during the rental period, it will attract capital gains tax. If the property is in your name, the tax will also be in your name. If the property is in the name of the estate, then the tax will be against the estate. 

Beneficiaries often think that the house is "tax-free" because it was a parent's principal residence. And so it is when it leaves the parent's name. But after that, the property does not retain the parent's tax-free status; it takes on the status of whoever owns it. If the estate owns it, there is capital gains tax because an estate has real estate that increased in value, and the estate doesn't get a principal residence.

While the beneficiaries of the estate do not have the right to tell you what to sell or not to sell, I would suggest that you disclose your plans to them (if you are not the only beneficiary). Though there is no rule that on its own imposes a deadline that will compel you to sell or transfer the property, beneficiaries do have a right to have an estate wound up in a timely manner. If you're planning to delay the receipt of their inheritance, they should at least be given the courtesy of an explanation. A beneficiary can take you to court to try to compel you to distribute the estate if they object to the length of time it is taking you, so do your best to keep lines of communication open.

2 comments:

  1. What an excellent question AND answer.

    It connects so much with my Estate Matter. If you will post it Lynne, I will write it up.
    Webeye

    ReplyDelete
  2. Besides the legal aspects of such a situation, the executor should heed the tax impacts.
    There are two potentially compelling reasons for NOT holding it in the name of the estate, or at least not for too long a period.
    The property is capital property of the estate, and if it is sold at a loss, the resulting allowable capital loss may not be useful to the estate, whereas such loss may be useful to the beneficiaries, depending on the various capital gains situations of the estate and the beneficiaries.
    The estate is subject to the same graduated marginal tax rates as an individual taxpayer (except for not being eligible for the basic personal deduction) for only the first three years of its existence. After that, the estate pays tax on all its income at the highest tax rate. If sold at a gain after three years, there is potentially a much larger tax cost to the estate than to the beneficiaries.
    This is a very simplified explanation. You absolutely should consult with a professional accountant to determine the tax impacts in your specific circumstances.

    ReplyDelete

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