Capital Gains on home sold in a living trust

[MtnTaxMan]

I think I know the answer to this but would confirmation. I have read so many different answers I'm bowjingled. I did a trust return for a client last year (a new client whom I knew prior). 2013 was the first year of the trust. The trust returns sows it as a complex trust -- I am not an expert in this area. His mom died that year leaving basically just a home. The home was NOT distributed to the bennie's. The trust sold the home in 2015 with the proceeds going to the bennie's. I believe the trust pays the tax and the bennie's show zero on their K-1s, correct? None of the bennie's lived in the home at any time. Lastly, the cost basis used for determining gain would be the FMV at the time of death, correct? Or would I use the adjusted basis since the trust sold the home and not bennies. Thank you! Bruce Tyler, EA

[DonB]

I think I know the answer to this but would confirmation. I have read so many different answers I'm bowjingled. I did a trust return for a client last year (a new client whom I knew prior). 2013 was the first year of the trust. The trust returns sows it as a complex trust -- I am not an expert in this area. His mom died that year leaving basically just a home. The home was NOT distributed to the bennie's. The trust sold the home in 2015 with the proceeds going to the bennie's. I believe the trust pays the tax and the bennie's show zero on their K-1s, correct? None of the bennie's lived in the home at any time. Lastly, the cost basis used for determining gain would be the FMV at the time of death, correct? Or would I use the adjusted basis since the trust sold the home and not bennies. Thank you! Bruce Tyler, EA

I use the FMV on dod as the basis in such situations and distribute any gain or loss to the beneficiaries.

[Snaggletooth]

Real Trust or not?

First question from my perspective would be whether the entity is a real "trust". If you say "living trust" it is possible that no irrevocable nature was ever given up and for IRS purposes your entity should be an estate rather than a trust. That would mean the basis of the house would be FMV at time of death.

If the trust is real, then I believe the basis would be the same basis of the decedent at the time the trust was created, not FMV. The accession of stepped-up value is not available via death.

This is a fundamental decision in estate planning when these instruments are drawn up. Most so-called "trusts" are simply devices to transfer title so nursing homes and hospitals can't go after the accumulated wealth, and are not recognized as trusts by the IRS.

If there was a "no strings attached" relinquishing of property where ownership and control are irrevocably surrendered, you do have a real "trust".

[DonB]

See TB page 21-7 "Revocable Trusts at Death", and page 21-13 "Author's Comment: Sale of decedents residence"

[MtnTaxMan]

I use the FMV on dod as the basis in such situations and distribute any gain or loss to the beneficiaries.

Don,

OK, if I do that, obviously the trust does not pay the taxesand the bennies would report any gain or loss based on the FMV at the time of death, correct?
I guess I do not get yet when an Estate Tax return is indicated vs a Trust Return.

Good news is: 8 hour seminar set up for May 27th! )

[MtnTaxMan]

First question from my perspective would be whether the entity is a real "trust". If you say "living trust" it is possible that no irrevocable nature was ever given up and for IRS purposes your entity should be an estate rather than a trust. That would mean the basis of the house would be FMV at time of death.

If the trust is real, then I believe the basis would be the same basis of the decedent at the time the trust was created, not FMV. The accession of stepped-up value is not available via death.

This is a fundamental decision in estate planning when these instruments are drawn up. Most so-called "trusts" are simply devices to transfer title so nursing homes and hospitals can't go after the accumulated wealth, and are not recognized as trusts by the IRS.

If there was a "no strings attached" relinquishing of property where ownership and control are irrevocably surrendered, you do have a real "trust".

Snaggletooth --- good question -- I will have to look at the trust. Trust seminar in May of the is year.

[MtnTaxMan]

See TB page 21-7 "Revocable Trusts at Death", and page 21-13 "Author's Comment: Sale of decedents residence"

Thank you sir --- will do that !

:O)

[TAXNJ]

Good drive

Don,

OK, if I do that, obviously the trust does not pay the taxesand the bennies would report any gain or loss based on the FMV at the time of death, correct?
I guess I do not get yet when an Estate Tax return is indicated vs a Trust Return.

Good news is: 8 hour seminar set up for May 27th! )

Compliments on your drive of this scenario. SNAGGLETOOTH and DONB give some good insight.

Hopefully, in addition to your training at the Seminar that you maybe working with an expert in this tax area and considering outside legal counsel. Reason is that sometimes not all beneficiaries are happy with results.

[Burke]

Don,

OK, if I do that, obviously the trust does not pay the taxesand the bennies would report any gain or loss based on the FMV at the time of death, correct?
I guess I do not get yet when an Estate Tax return is indicated vs a Trust Return.

I think you are talking about an Estate Income tax return, vs a Trust income tax return (and not the Estate Tax return which is for estates over $5m+.) The IRS makes it easy for you in such cases as you describe, given the assumption this was indeed a Revocable Living Trust. You treat the estate and trust as one entity by electing 645 treatment and filing Form 8855. See instructions under Forms & Pubs, www.irs.gov.

[DonB]

Don,

I guess I do not get yet when an Estate Tax return is indicated vs a Trust Return.

If the Estate has income of $600 or more an Estate Income Tax return is required and can be combined with the trust as Burke has described. The Estate income would be from financial accounts or assets not in the name of the trust and with no named beneficiaries. .