1099-S Need Guidance (New Client)

[katie]

Hello Community!

New client was next of kin and inherited a home in California. Client lives in Illinois.

Client immediately sold the California home, he only paid $3,000 for new septic tank prior to listing home. 

Client received a 1099-S and provided me with Settlement Statement. 

My question is, do I need to file a California state return since property was in California? Client never lived in California. 

Thanks!

[IRonMaN · Accepted solution]

California is going to be looking for a return, although it sounds like there probably isn't going to be any tax due under the circumstances.

[katie]

Thank you!

[IRonMaN]

You betcha!

[katie]

Finished his return and I noticed that there is a tax penalty.

How come ProSeries is calculating an estimated tax penalty? Prior to entering the inherited sale of home he was going to receive a small refund. Is the tax penalty because he didn't pay taxes on it upon receiving proceeds? He normally gets a refund, he has never had to make estimated tax payments. 

[rbynaker]

Every situation will be different but more often than not, there's not a gain on the sale of a property if sold shortly after inheriting it.  How did you determine basis?

[BobKamman]

Are you sure California state tax was not withheld from the proceeds? 

[katie]

First time filing this form. My on-site CPA passed away in early February. This is way over my head.

1099-S Box 1: 04/03/2023 Box 2:$1,000,000 Box 6: $1,436.33 

On Schedule D Part II I have:

Proceeds $1,000,000

Cost (or other basis) $3,000 because he paid $3,000 to install a new septic tank

Gain is calculated at $290,457.

He owes IRS $46,572

If I exclude the $1,000,000 sale proceeds his taxable income would be $60,531.

I am contacting CPA firms to see if they would be able to review this for me as I am nervous now. I am a CPA student but this is over my head. 

Any help is appreciated. 

[katie]

Would this be on the 1099-S? I don't see it. All client provided was 1099-S and Settlement Statement. 

[IRonMaN]

No, it doesn't show up there.  But if the person died shortly before the house was sold, the normal treatment is to use the basis of the house as the same amount as the selling price.  If it was held for a long time or used personally, that does change that approach.

[katie]

The person died 09/22/2022 and sale of home was 04/03/2023.

[BobKamman]

I think there's a separate 1099-like form from California to show tax withholding, but it might be buried in the paperwork from the escrow company.  The amount, if any, should also show up on the closing (settlement) statement, but might be difficult to distinguish from property taxes.  Californians here might provide more guidance.  

[abctax55]

Form 593-'x' (A, B, or C, I think - usually A) is generally(*) completed on real estate sales in CA.   This tells the title escrow Company how much to withhold.  The computation is 3.333% of the selling price  OR  12.3 % of the 'gain'.   Obviously, the 'gain' can be manipulated (altho there is a computation part of the form to list cost + improv etc).

IF the title/escrow Company was told there's no gain, OR if told it was a primary residence with the @ 250/$ 500,000 box checked - there wouldn't be any withholding.

@katie  - this Form 593 is often/usually buried deep in the 3# stack of closing papers.  The amount WILL show on the closing/HUD statement tho as "FTB withholding".  A call to the title Company (probably with someone on the closing statement for authorization) might be in order IF there is an amount on the closing statement but the F.593 is MIA.

(*) I say generally because I just went thru this with a local small town title Company (a franchise) that messed up the F.593 so badly it's funny/sad?

[Terry53029]

@katie When a home is inherited there is a step up in basis, Your client would have a basis of the value of the home on the date of passing of the person he inherited it from. See IRS link.

https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritan...

[sjrcpa]

And the holding period for inherited property is long-term.