Is the interest portion of a mortgage payment for an estate considered taxable?

by Alan M. Schapire, CPA | May 23, 2018
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My father owned his house (no mortgage or lien). Before my father passed away, he arranged to sell his house to a relative. The resulting mortgage note was left to the estate upon his death. Within about two years, the mortgage note was paid off and the estate released the lien. My question is, during the time the estate was receiving mortgage payments on the note, is the interest portion of the mortgage payment considered taxable "interest income" for the estate? Or is it considered nontaxable inheritance for the heirs of the estate?

The estate would recognize interest income for the interest portion of the mortgage payments received up to the payoff of the note. This income is subject to income tax, not estate or inheritance tax, when received. The estate would file Form 1041, U.S. Income Tax Return for Estate and Trusts, and the corresponding state return (Form PA-41, PA Fiduciary Income Tax Return if in Pennsylvania) to report the income and remit any tax liability. The principal balance of the mortgage on the date of death would be considered nontaxable inheritance.

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Answered by: Alan M. Schapire, CPA, is a principal with Convergent Financial Strategies LLC in Wayne, Pa.

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