If I sell a commercial building inherited through an estate (the estate has not been closed yet and will be closed once the building is sold) do I have to pay taxes on the sale? Here are the specifics. We are owner financing a balloon payment expiring in 5 years. The estate was opened in 2008 (federal tax unified credit I have, and the state that the estate is in does not collect estate taxes). Do I have to pay federal taxes on any of the interest earned over the 5 years? Do I have to pay taxes on the down payment or balloon payment? When all is said and done over the 5 years the total sale will exceed the appraised value of the building in 2008. Any links would be helpful.
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The sale after the date of death has a basis from the date of death.
The owner-finance creates NEW interest income, so that income is taxable on form 1041.
If you distribute money each year that is more than the interest income, the beneficiaries will be taxed on their own tax returns.
So the property is being sold while title is still held by the estate in probate? If so, “you” are not actually the owner. The estate is and should pay any taxes prior to completion of probate.
Only the estate pays “estate taxes”, not the inheritor. For a death in 2008, the unified credit exclusion was $2 million. This must be transferred via a will and anything above this may be taxed at up to 45%. Again, only the estate pays Federal estate taxes (which of course, reduces the amount available to the inheritor). Since the state that the estate is in does not collect estate/inheritance tax, you don’t have to pay that either.
For the inheritor, there are two components to the sale of the inherited building–1) the principal value and 2) interest from the balloon. The interest is taxable as ordinary income as and when received and the principal is taxable only to the extent that it exceeds the value at inheritance.