Write a New Property Sale Agreement for an Estate
If you are administering an estate in which the decedent was in the middle of a property transfer at the time of death, cancel the old purchase and sale agreement. Then write a new agreement in which the estate, rather than the decedent, is the seller of the property. Writing this new agreement allows you to take advantage of the step-up-in-basis and also helps you avoid income tax on the sale.
As far as costly mistakes go, not ending an existing real estate purchase and sale agreement when the decedent is the seller is huge! Not doing so can substantially increase the taxes you’ll owe on the sale, costing the estate, and the eventual heirs, big-time.
Real estate rarely changes hands on the day the buyer and seller agree to the purchase and sale. In fact, it often takes many weeks, if not months, between the handshake and the deed.
In that period between the agreement and its final execution, that property’s in limbo. You’ve established a price for it that the courts will almost always accept as its fair market value. But you’ve also created an expectation of money being received, which it hasn’t yet been.
So, in essence, because the agreement was reached before the decedent’s death, you now have two assets:
The property itself, reportable on Form 706
The cash that’s been promised, reportable on Form 1041
You, as executor, are caught in a never-never land. You’ve lost the all-valuable step-up-in-basis. The estate is also not eligible for the $250,000 per person exclusion of capital gain because the exclusion is per person, not per entity.
When a seller dies in mid-property transfer, canceling the old purchase and sale agreement and rewriting a new one, with the estate as the seller, allows you to take full advantage of the all valuable step-up-in-basis, as well as avoids any income tax on the sale.
Remember, the only difference between the old agreement and the new is that the decedent’s estate is now the seller, not the decedent.