Question

On June 1, 2017 Mario entered into a contract to sell real estate for $1 million (adjusted basis $200,000). The sale was conditioned on a rezoning of the property for commercial use. A $50,000 deposit placed in escrow by the purchaser was refundable in the event the rezoning was not accomplished.

After considerable controversy, the rezoning application was approved on November 10, and two days later, $950,000 was paid to Mario’s estate in full satisfaction of the purchase price. Mario had died unexpectedly on November 1. Discuss the estate and income tax consequences of this set of facts if it is assumed that the sale of the real estate occurred:

a. After Mario’s death.

b. Before Mario’s death.

When do you think the sale occurred? Why?

Answer 1

Answer

There is estate tax exemption of 5,250,000 in 2013.
The property sold is for a price of 1,000,000. No other assets are specified of
the deceased. So Nil estate taxes, below exemption limit, similarly lifetime gift tax
exemption below limit. estate tax is payable only after death of mario not before the death, but not payable since below exemption limit.

Marios tax basis in 200,000 for the property

he enters into a contract to conditionally sell property for 1 million but dies before the sale condition is fulfilled.

The fair value in hands of Marios successors is 1 million and it is sold for 1 million so no capital gains, since

inheritance of the property has its basis is stepped-up to its fair market value on the date of Marios's death.

If the sale occurs before marios death he would have to pay capital gains tax on 800,000.

The sale was conditioned on a rezoning of the property for commercial use. the application for rezoning was approved on November 10. hence the sale was completed on Nov 10. Had the rezoning not been approved, the initial amount of 50,000 would be refunded and sale would not take place as per the contract.

Hence the sale occurred on Nov 10 after Marios death on Nov 1.