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.
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