Is property sold in a trust taxable? Inheriting a home through a trust usually simplifies the selling process, until you consider capital gains taxes.
Q: I need some advice about selling a home held jointly in a trust in my name and my brother’s name. This was my mother’s house originally and she has since died.
The house is completely paid off and we want to sell it. I want to make sure that I take the right steps for tax purposes and I want to know if there are any missteps or obstacles to look out for that could cause other problems for us.
The house is not ready for sale now, but I want to be prepared when we do put it up for sale. Do you have any suggestions on how we should proceed?
A: There’s always a first time for everything, including buying or selling a home. But the good news is that your mother was thinking about how difficult it would be for you to sell the property “someday,” and she put her house into a trust to help you out.
One way a trust helps is by allowing you to own the property and avoiding having to go to a probate court. When your mother set up the trust, she transferred ownership of her home from her name to the name of her trust. She then named you and your brother as the successor beneficiaries of the trust. When she died, the property stayed in the trust, and you and your brother automatically became the beneficiaries under the trust. That same trust document probably named you and your brother as successor trustees. So, you avoided the expense and time of probate court and are free to sell the property at any time in the future.
When you sell the property, you’ll be selling it through the trust. This means that the trust will convey ownership of the property to the subsequent buyer. The money from the sale will go into the trust, and then will either be disbursed to you and your brother – or not, depending on what the trust says or what you and your brother decide.
In terms of future federal income taxes owed, most living trusts used to hold a home will require you to treat the trust as a separate entity once your mother has passed. Once your mother has died, the trust will have to file a tax return just as any person does on an annual basis. When assets, including a piece of real estate, are sold while inside a trust, the trust itself will report the sale.
You and your brother effectively inherited the home when your mother died. You and your brother became beneficiaries of the trust and by extension now own the home. By inheriting the property, even if it is held inside a trust, it receives a stepped-up basis. This means that the cost of the home to you and to your brother is the value of the home at or around the time your mom died. If you sell the home shortly after her death, you and your brother will pay no federal income taxes on the sale. If you do pay tax on the sale it would be due to you holding the home a good period of time after her death and having the home appreciate in value above and beyond the value of the home at or around the time of her death. So the good news for you is that the property now carries the value it has as of the date of your mother’s death, not the date she purchased it.
Here’s an example to illustrate how this would play out: Let’s say your mother bought the property 30 years ago for $100,000 and now it’s worth $1 million. You’ll use the $1 million figure when calculating any federal income taxes you might owe. In other words, if you sell the property for $1 million today or within about a year after your mom’s death, you shouldn’t owe any federal income taxes on the sale of the home. However, if the property is worth $1 million on the day of death and two years from now you sell the property for more, you would add the cost of sale (like the broker’s commission) plus the cost of any capital improvements and even some expenses relating to the costs of fixing it up for sale, and subtract that from the sales price then compare that number to the value on the day you inherited the property to come up with the true amount of the gain.
For 2018, and presumably this year (2019) and thereafter, long-term capital gains are taxed based on your marginal tax rate, and depending on your tax bracket will be either zero percent, 15 percent or 20 percent. According to the IRS.gov, for the tax year 2018, the 20 percent maximum capital gains rate applies to estates and trusts with income above $12,700.
You can find out more information by checking out Instructions for Form 1014 (2018 is the most recent version available) at IRS.gov/Form1014 (which should have any updates, such as legislation enacted since the form was published). And, you may want to talk to a tax accountant, estate planner or person that helps you with your taxes to make sure there isn’t anything specific to your situation or the sale that could throw you a curveball next April 15th.
More on Trusts
Can You Sell Your Home if it’s Held in a Living Trust?
Should You Have a Transfer on Death Deed, a Living Trust or Both?
if i don’t pay property tax in a property that is in a trust. Somebody can do a foreclosure tax lien
You should consider getting a property tax ‘parent/child’ exemption for the time the property is in the trust. This will avoid unexpected supplemental taxes year(s) after you sold the house. In San Diego they issued a large supplemental tax bill stating that the house was worth the sale price on the date that the parent died and the new tax rate as determined by the new sale price was due for the 5 months while the property was in the trust! This bill was issued 15 months after the sale of the house and 13 months after the trust was ‘completely’ settled! This leaves the executor of the trust liable for the whole amount since the other children want nothing to do with more bills.
Also, does anyone know how the county can collect this money since the trust died 13 months ago and the property cannot have lien placed on it with new owners? All they have is the C/O Executor name and address.
Fritz,
Thanks for the information and update. I’m sure our readers appreciate it.
Ilyce
Questions and background: My parents (in Utah) had a revocable trust which only included their paid-off house. Dad passed in 2018, mom had dementia and could no longer live in the home by herself, and I moved her to an assisted living facility in 2018. I, as trustee, sold the house in 2019, after declaring my mother incompetent per the trust, and put the proceeds from the house sale in a bank account to pay for my mother’s care. That bank account was NOT part of the trust. The bank account was initially in my parents’ name (not the trust) with me on the account. The bank said I needed to take ownership of that bank account (due to my mother’s condition) which is now in my name.
The proceeds from the sale of the house, which I put in that bank account, plus her social security, paid for my mother’s expenses and care. Mom passed in early 2020. After paying the last of mom’s final expenses, I disbursed to the beneficiaries the majority of the remaining funds.
Questions: Being the house was the only item in the trust, was the trust dissolved once the house was sold or is there something else I need to do legally to dissolve the trust per Utah law? Was I OK putting the proceeds from the sale of the house, in what was once mom/dad’s bank account (not in the trust), that I then needed to take ownership of, to pay for mom’s expenses and care? Would the funds from the sale of the house that were deposited in the bank account be considered “trust” money for the $600 gross amount limit per the tax laws?
Thank you for helping me maneuver this dilemmaQuestion and background: My parents (in Utah) had a revocable trust which only included their paid-off house. Dad passed in 2018, mom had dementia and could no longer live in the home by herself, and I moved her to an assisted living facility in 2018. I, as trustee, sold the house in 2019, after declaring my mother incompetent per the trust, and put the proceeds from the house sale in a bank account to pay for my mother’s care. That bank account was NOT part of the trust. The bank account was initially in my parents’ name (not the trust) with me on the account. The bank said I needed to take ownership of that bank account (due to my mother’s condition) which is now in my name.
The proceeds from the sale of the house, which I put in that bank account, plus her social security, paid for my mother’s expenses and care. Mom passed in early 2020. After paying the last of mom’s final expenses, I disbursed to the beneficiaries the majority of the remaining funds.
Questions: Being the house was the only item in the trust, was the trust dissolved once the house was sold or is there something else I need to do legally to dissolve the trust per Utah law? Was I OK putting the proceeds from the sale of the house, in what was once mom/dad’s bank account (not in the trust), that I then needed to take ownership of, to pay for mom’s expenses and care? Would the funds from the sale of the house that were deposited in the bank account be considered “trust” money for the $600 gross amount limit per the tax laws?
Thank you for helping me maneuver this dilemma
Terrie Thompson.
Terrie Thompson.
Hi. I am just curios if you ever received an answer to your questions regarding your sale of your parents home, the putting of the money into bank account that was not in the name of the trust, and if the funds form the sale of the house would be considered “trust” money for the $600 gross amount per tax laws. I have very similar questions regarding the recent sale of my fathers home and associated proceeds, and am really having a difficult time finding answers. Thank you! Katie Powers
Katie, I’m in the same boat.
I’m getting offers on my moms house now. It’s in a trust snd she passed 2 years ago.
I’m also in a settlement case with Terminex that has kept me from selling.
But values have gotten too good not too sell.
I did not get an appraisal at death, but a Terminex did. And my buyer is getting one.,I’d love to avoid any tax exposure for the trust..
E-mail me if you want Tom Tcd60 at yahoo
I’d love to hear what your going through.
We are in Alabama close to the bay.
The house is the only thing in the Trust. I’m on her checking account, but know I need to get a Fed TaxID # that takes 5 min online and open a checking account in the trusts name. Mon does not own the house, the Trust does..
Sounds to me, you sold the house before your mom died. She would have been the natural beneficiary of the trust anyways. So putting the proceeds from the sale of the house into her checking account and not the Trust’s checking account is the same thing. Sort of. And since the Trust has no asets now, the Trust is dead.
But since money was made, I’d assume the IRS will want a tax return. Any CPA worth their salt can fix any lose ends.
I know the IRS. They will figure it out if it takes 10 years down the road. You will get a letter tied to your SS# as the trustee.
I’m sort of interested at closing how they wrote the check out? And to who? The title Company had to make the check out to the name on the last registered warranty deed. The last one registered in your county tax office. Did your parents register the warranty deed from the creation of the trust at the county tax office?
At closing the check should have been in the name of the trust. If the check was made out to your parents, then the buyer has a tainted deed.
The Trust still owns the property. The buyer has been paying taxes and living large in the home, so they have squaters right and ownership. It could get dicey when they sell.
I’m no expert, but I’ve seen a lot. You have a fascinating story.,
I am also very curious about who owns what when for taxes–my parents owned some (undeveloped) land for decades, then put it into a revocable trust. Mom died, dad fell to dementia, I’m trustee. Land sold and money went into the trust (which is all still technically dad and is used to take care of him). Is the basis his purchase price or the land value when the property went into trust?