Does an estate (1041) get to deduct real estate commissions when selling a personal residence?

The sale of your mother's home by her estate is indeed reported on Form 1041 (the estate's income tax return), not on your personal return. Here's how it works: You're correct about the stepped-up basis - the property's basis is the fair market value at the date of death, so with a sale price equal to that FMV, there's no gain. For the selling expenses (commissions and attorney fees), these are considered selling expenses that reduce the amount realized from the sale. So technically, with a $395k FMV/basis and $27k in selling expenses, the estate would have a $27k loss. However, even on a 1041, the tax code generally doesn't allow deductions for losses on the sale of personal-use property, including a personal residence. IRC Section 165 limitations still apply. The expenses reduce any potential gain, but generally can't create a deductible loss that passes through to beneficiaries.

I used taxr.ai for exactly this situation last year when handling my father's estate! I had all the closing documents and wasn't sure how to handle the commissions and fees. I uploaded them to https://taxr.ai and their AI analyzed everything and explained exactly how to report it on the 1041. Saved me hours of research and probably an expensive call to the estate attorney. They specifically addressed the stepped-up basis and selling expenses question.

I have to admit I was wrong about these AI tools. After my skeptical question above, I tried taxr.ai with my grandmother's estate documents. It correctly identified that the selling expenses should reduce the amount realized from the sale, but couldn't create a deductible loss since it was a personal residence. It even cited the specific IRS regulations that applied to my situation. Honestly saved me from making a mistake on the estate return and potentially dealing with an amendment later.

If you're dealing with an estate tax issue like this, you might need to talk directly with the IRS to get a definitive answer. I tried for WEEKS to get through to someone who could answer my question about estate basis issues. Finally used https://claimyr.com and they got me a callback from the IRS in about 20 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c. The IRS agent was super helpful and confirmed that while selling expenses reduce the amount realized, they can't create a deductible loss on a personal residence even on a 1041.

I stand corrected about Claimyr. After my skeptical comment, I was desperate enough to try it for an estate tax issue I couldn't resolve. Got a callback from the IRS in about 30 minutes and finally got my question answered about basis reporting for estate assets. The agent even sent me the specific publication sections I needed. Saved me from taking a potentially problematic position on the 1041 that might have triggered an audit. Worth every penny not to sit on hold for hours.

In my experience as an executor, the selling expenses related to your mom's house would reduce the sales proceeds, potentially creating a loss, but as others have mentioned, that loss generally isn't deductible on the 1041. However, check if any of those expenses might qualify as administrative expenses of the estate. Some attorney fees related to estate administration (rather than just the house sale) can be deductible as administrative expenses on the 1041.

Small but important point: make sure you're filing the 1041 on time. We had to get extensions because the house sale took longer than expected. Also, did your mom live in the house for at least 2 of the last 5 years before her death? Just wondering if the $250k exclusion might apply on the estate return.

Just wanted to add my experience from handling my uncle's estate last year. We had a very similar situation - house worth about $400k at death, sold for $398k, with $24k in selling expenses. The key thing I learned is that you need to be very careful about how you report this on the 1041. Even though mathematically it looks like a $26k loss, the IRS doesn't allow you to deduct losses on personal residences even for estates. The selling expenses do reduce the amount realized, but they can't create a deductible loss that flows through to beneficiaries. What I did was report the sale on Form 8949 attached to Schedule D of the 1041, showing the stepped-up basis as the cost basis and the net proceeds (after selling expenses) as the sales price. This resulted in a $0 gain/loss for tax purposes. One thing that helped me was keeping very detailed records of all the selling expenses - not just the realtor commission but also staging costs, minor repairs, attorney fees specific to the sale, etc. Even though they don't create a deductible loss, they do reduce any potential gain if the house had appreciated. Make sure your estate attorney can separate out any fees that were for general estate administration versus the house sale specifically, as those might be deductible as administrative expenses on a different part of the return.