My father passed away in 2010 and left the house to me and my sister. I have lived in the house for the past 19 years and am executrix of his estate. We recently sold the house for much less that what the estate attorney estimated on the estate tax return. Which amount do we pay the estate tax on and do I have to claim this as capital gain on my next tax return? The proceeds went to me to distribute.
If the value reported on the Estate Tax Return is more than what you sold it for, there is no gain or loss. I would for my own peace of mind, get a copy of the return and make sure of the way that the value of the house was calculated. 2010 was an interim year and depending on elections and the size of the estate, a carryover basis instead of a stepup should have been used.
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I assume you mean PA inheritance tax and not federal estate taxes. When you file the PIT return you should list the value at the sale price, so that you pay PIT on that amount.
As for the capital gains you would use the date of death value as your basis so there would be no gain or loss.
Finally, if you got all the proceeds from the sale your sister has made a gift to you and she is subject to gift tax rules. She will need to file a Form 709 and use her annual donee exlusion and lifetime credit to avoid gift taxes. For an article on this area and how the IRS is policing this area please read IRS Checking Real Estate Transfers For Unreported Gifts at the following link: http://www.sjfpc.com/IRS_Auditing_Real_Estate_Gifts_Tax_Rules_Returns_Form_709.html
Hope this helps.
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