Tax consequences of foreclosure and capital gains.


My mom passed away in September 2014. Her mortgage co filed foreclosure a month later. $74,000 was owed on the original debt, but unpaid taxes and fees made it closer to $104,000. Property sold for a profit in June 2016 and her estate received a check for $10,000.   Mortgage co reported original debt of $74,000 and sale price of $114,00, meaning it looks as though her estate earned $40,000 instead of the $10,000 received.
Do I, as her trustee, have to somehow pay taxes on that $40,000 even though the profit was only $10,000? Her estate was small and does not have that kind of money left to pay.   What can I do, if anything? Thanks.


Capital gains is applied to the difference between the sales price and the basis price of the property. Basis price is the fair market purchase price plus capital gains minus any depreciation. The basis of a property is “stepped-up” to fair market value on the date of the decedent’s death. The debt on the property is not considered when reporting the gain. Typically the sales price of the property is the de facto fair market value if the property is sold within a year from death. Conceivably, the gain could be zero if you placed the property on the market soon after the decedent’s death requesting a reasonable price and it did not sell because the market was so bad. A CPA or a tax attorney will be able to file the 1041 correctly to minimize the gain reported.

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