What Happens to Rental Income During Probate?
When a property owner passes away, rental income from their real estate becomes part of the estate and must be managed through probate. Understanding how this income is handled is crucial for heirs, executors, and tenants.
Who Collects and Manages the Rental Income
- The executor or personal representative of the estate is responsible for collecting and managing rental income during probate.
- Appointed by the will or the probate court, the executor ensures tenants continue making payments, maintains financial records, and deposits funds into an estate account.
- Keeping estate funds separate is required by law to prevent disputes.
- If the rental property was owned through a trust, the trustee, rather than an executor, manages the income. A revocable living trust allows rental income to bypass probate, enabling the trustee to handle the property without court involvement. This can speed up access to funds and avoid probate-related delays.
- Tenants must receive formal notice regarding payment instructions from the executor or estate attorney.
- If a property management company was already handling rent collection, the executor may allow them to continue, provided the estate can cover management fees.
Paying Debts and Expenses From the Estate
Before rental income can be distributed to heirs, the estate must pay all debts and tax obligations.
- The estate is considered a separate tax entity, requiring the executor to obtain an Employer Identification Number (EIN) from the IRS.
- This EIN is used when filing Form 1041, which reports rental earnings and deductible expenses.
- The estate is taxed on net income, meaning allowable deductions—such as property management fees, repairs, and depreciation—can reduce taxable liability.
- Executors often distribute income to beneficiaries, shifting taxation to their personal returns where lower marginal rates may apply.
Distribution of Remaining Rental Proceeds to Heirs
Once all debts and tax obligations are settled, the executor can distribute the remaining rental proceeds to heirs. The distribution follows the deceased’s will or, if no will exists, state inheritance laws.