Planning for Life

The Massachusetts Estate Tax on Out-of-State Real Estate: Conflict, Quandary, and New Court Ruling

Posted by Harry S. Margolis on November 22, 2016

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By Harry S. Margolis

If a Massachusetts resident dies owning real estate outside of the state or the country, can Massachusetts tax it in your estate? If you look at Massachusetts law, the answer is "yes." This is because the Massachusetts estate tax is calculated as the federal estate tax credit that was available under the federal estate tax in place back in 2000. Since the federal taxable estate includes all the decedent's property wherever held, the Massachusetts tax does as well.

In some cases, there's no problem because if the other state taxes the real estate, Massachusetts provides a credit for the tax paid. 19 states have estate or inheritance taxes, or both, though New Jersey just voted to repeal its effective at the beginning of 2018.  But if the other state doesn't tax the real estate because it has no estate tax or the size of the estate falls under the state's threshold, the personal representative is left in a quandary. This is also true for out-of-country real estate.

The Conflict

However, the US Supreme Court has held that states cannot tax out-of-state property because doing so violates the due process clause of the US constitution. You might think that the US constitution should govern. But the Department of Revenue workers don't look to the constitution for guidance; instead, they look at state law and regulations. So what should the personal representative of an estate holding out-of-state real estate do?

The Quandary

The problem is that if the personal representative doesn't report the real estate and pay a tax, the DOR may impose the tax along with interest and penalties.This is also true if she reports the real estate but explains why she's not paying taxes on it. Another approach is to pay the tax and then file an amended tax return seeking an abatement of the tax attributable to the out-of-state realty. This is what F. Davis Dassori did as the executor of an estate that owned an apartment in Paris. Unfortunately, the DOR turned down the abatement request. Dassori appealed this to the probate court.

The Case

The probate court in Dassori v. Commissioner of Revenue (Middlesex Probate Court MI-14E00-42GC, June 30, 2016) ruled in the estate's favor, but the constitutional issue was almost an afterthought. The main question before the court was whether the form of ownership of the Paris apartment meant that the estate owned an investment, which would be taxable by Massachusetts, rather than real estate, that was not taxable. It seemed to be assumed that Massachusetts could not tax Paris real estate no matter what Massachusetts law itself says.

What to Do Now

This gives more weight to estates taking the position that out-of-state property is not taxable in Massachusetts. However, since this is a trial court decision and the court did not focus on this issue, it may not be entirely dispositive. Going forward, we are advising personal representatives of estates that have paid tax on out-of-state property to seek an abatement and those filing new returns to report the property but not to pay tax on it. We will explain on the estate tax return why we believe that the property is not taxable in Massachusetts.

Topics: Probate Estate Administration, estate taxes

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