What do you do if you fear IRS scrutiny for selling items you inherited? Tax guru and small-business expert Barbara Weltman, founder of Big Ideas for Small Business, Inc., delved into this issue for those worried about how changes to Form 1099-K reporting will impact them.
When a relative or friend dies and you inherit household goods and other items, what are you going to do with them? Likely, you’ll pick the things you want or need and then dispose of the rest. You may give some items away or sell them. When it comes to a sale, the tax rules can get confusing, very confusing. Let’s try to sort things out for those who aren’t in business and are merely disposing of assets held for personal use.
Are you profiting from the sales?
To know the answer, you must first know your “basis” in the items. When you inherit property, you get a tax basis equal to the property’s fair market value on the date of the owner’s death. How do you determine your basis? Depending on the size of the owner’s estate, there may or may not be an estate tax return. If there is one, then the executor is required to provide you with Schedule A of Form 8971 listing the basis of assets.
If there’s no federal estate tax return—which is the case for most estates these days—then it may be up to you to determine fair market value. Some states require an accounting of assets subject to probate, although there may be a “small estate” exception. If you sell the items relatively close to the time you inherited them, then the sale price is likely representative of the inherited fair market value.
Profit—called gain in tax parlance—is the difference between (1) what you receive, and (2) your tax basis, plus your sale costs (e.g., shipping if you pay for it; eBay fees; PayPal fees). If you happen to see a profit, which is unlikely, you must then report it and it becomes subject to tax.
If, however, you break even or have a loss, it doesn’t impact your taxes. You can’t deduct loss on the sale of assets held for personal use. Do you have to report it anyway? The IRS has said “income from auctions akin to an occasional garage or yard sale is generally not required to be reported.” But for online sales where they are made electronically, reporting may be necessary even for loss items.
Did you receive Form 1099-K?
Form 1099-K is an information return that payment card and third-party networks must file with the IRS—and give a copy to you—if payments for the year exceed a total of $600, regardless of the number of transactions. These payments include PayPal and credit card transactions.
You need to show the amount reported on the 1099-K because IRS computers are going to find it. The form reflects the gross amount of the transactions and not your profits. It doesn’t reflect any returns you may have made. And it doesn’t take into account your tax basis for determining gain or loss. So, you aren’t necessarily taxed on the amount shown on the form, but you can’t ignore it. What do you do? The IRS has never addressed this situation of selling personal use assets at a loss even though the transactions are reported on Form 1099-K. Tax professionals disagree about how to handle this. Here are some thoughts.
- You aren’t in business, so you don’t need to file Schedule C of Form 1040 to report your sales and show the amount from the Form 1099-K.
- You probably shouldn’t report it as “other income” on Schedule 1 of Form 1040 because the transaction involves a sale.
- You likely should report it on Form 8949. Use Part II because all inherited property automatically is treated as long-term, regardless of how long the deceased owner or you held the items before the sale. You can report the items as a collection, with items sold labeled as “various.” Then be sure to make the proper adjustments in columns (f) and (g).
Will the 1099-K increase my audit risk?
There’s been much publicity about the 87,000 new IRS agents to be hired and suggestions that this will increase audit rates for everyone. The Treasury Secretary has said audit rates, which are currently VERY low, won’t increase for those with income below $400,000. Of course, there’s no guarantee that you won’t be one of the unlucky few to be tapped for an audit, even if the amount the IRS thinks you owe is modest. Failing to report income that could easily be picked up by IRS computers under its information matching program is an invitation for at least a correspondence audit—a letter questioning a return and, in the least, asking for more information.
The best defense: be sure to disclose 1099-K information on your return in some way. Talk with your own tax adviser for the best course of action for your situation.