Lien payoff with taxation as part of an estate

[Ken.Maness]

Jurisdiction

North Carolina

My mother put a lien on someone's house years ago, she passed in 2014 but the house was foreclosed a few years ago. After hiring a lawyer part of the lien was awarded to her heirs including me, of approximately $29k divided three ways.

I recently received a 1099-MISC, but I thought that a #1 that a lien payoff was not taxable, and #2 that estate proceeds were not taxable until the amounts reach much larger amounts.

 

[Zigner]

My mother put a lien on someone's house years ago, she passed in 2014 but the house was foreclosed a few years ago. After hiring a lawyer part of the lien was awarded to her heirs including me, of approximately $29k divided three ways.

I recently received a 1099-MISC, but I thought that a #1 that a lien payoff was not taxable, and #2 that estate proceeds were not taxable until the amounts reach much larger amounts.

Receipt of a 1099 doesn't mean that the amount is taxable. The person issuing the 1099 has no way of knowing your situation. All the 1099 does is to notify you of the amount reported to the government related to the transaction. It's now on you to figure out if it's taxable.

 

[adjusterjack]

I thought that a #1 that a lien payoff was not taxable,

Depends on what the lien was for. If it was a loan repayment then only the interest portion would be taxable income to the estate.

#2 that estate proceeds were not taxable until the amounts reach much larger amounts.

Not taxable to the heirs until it reached the lifetime exclusion.

But income to the estate could be taxable to the estate depending on the source and type of income.

It would help if you explained the lien.

 

[Tax Counsel]

My mother put a lien on someone's house years ago, she passed in 2014 but the house was foreclosed a few years ago. After hiring a lawyer part of the lien was awarded to her heirs including me, of approximately $29k divided three ways.

I recently received a 1099-MISC, but I thought that a #1 that a lien payoff was not taxable, and #2 that estate proceeds were not taxable until the amounts reach much larger amounts.

As for #1, for federal tax income tax law (which is what the 1099-MISC is about), the type of lien and the specifics of the debt underlying it matter as to what, if any of it, is taxable income. What box(es) of the 1099-MISC are completed and what are the amounts in each one? Note that estate or beneficiaries are liable to pay income tax on income the estate receives. Whether the estate pays it or the beneficiary pays it depends on several factors that I won't go into here. Suffice to say, though, that having it paid by the estate would in most cases cost more in tax, meaning less money for the beneficiaries.

It may be that only a portion of what was reported is actually taxable income. As I said, the details of the lien and what the underlying debt was matters.

As for #2, I think you are referring to the federal estate tax, which is effectively a one time property tax. Her estate would owe the tax and the tax would only apply if her gross estate exceeded $5,340,000. That was the amount of assets exempt for a single person in 2014. Today, the amount exceeds $10 million. Very few estates today are subject to the estate tax as few people die with more than $10 million in assets. So it is extremely unlikely that any federal estate tax applied to the estate and if it did, the estate should have filed and paid that return years ago.