Should I distribute real property to the beneficiaries or leave it in a Trust to sell the property?

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An irrevocable Trust set, owned by my deceased parents owns a section of real property. The cost basis for the property was determined at the time of the first parent's death sixteen years ago. The second parent died thirteen years ago. The Trust has three beneficiaries. The property includes a rental house and a section of several acres of land in California. The house has provided income from before the death of our parents.

Should we leave the property in the Trust to sell it and then distribute the proceeds or should we distribute and split the property three ways to sell it? The selling price of the property will be less than the cost basis.

Would the title company typically handle the transfer of the property?

I have been filing a simple trust on form 1041 using TurboTax Business for twenty years.

TurboTax Business Windows

MaryK4

Alumni - Intuit

You should first consult the trust document to see if there is any specific instructions you need to follow. You may also want to consult with an attorney to protect yourself as trustee. In general, it is administratively more simple for the trust to sell the property then distribute the proceeds.

Since the selling price is less than the basis, you must also evaluate the best way to utilize the tax loss. If the trust sells the property, and the trust dissolves, the losses will be passed to the beneficiaries. If you distribute the property first, each beneficiary can use their share to offset their own capital gains if they have any.

If the loss will qualify as section 1231 (you would need to verify that the 20 years of rental history qualifies it for the 1231 treatment) because it was a rental, so it will be an ordinary loss that can be used to offset income.

If the trust sells the property, the property transfers from trust to buyer. If it is distributed first, you would need to transfer using a Grant Deed before transferring to buyer.

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Frank nKansasAuthor

Level 5

Thank you for the help!

If the advantage of section 1231 does apply, would that advantage still apply whether the property is sold directly to the buyer from the Trust or whether it is first distributed to the beneficiaries and then sold to the buyer?

If section 1231 applies either way, would there be any advantage of distributing the property to the beneficiaries rather than to directly selling it from the Trust to the buyer?

Could the property be distributed to the beneficiaries using grant deeds at the same time as it was being sold to the buyer? I don't know why such an option would be chosen, but if the property is sold soon, I doubt there would be time to do the distribution to the beneficiaries and the sale with an extended amount of time between the two events.

Thank you!

KrisD15

Alumni - Intuit

Something additional to consider,

if the property was owned by the Irrevocable Trust and was used as a rental, are you calculating the "Adjusted Basis" as the Original Cost less Depreciation (taken or should have been taken)? The gain or loss on the sale will be the sale prices less "Adjusted Basis" if it is sold by the Trust.

Since it seems the rental had been active for over 13 years, the depreciation recapture should be significant.

Property inherited from an irrevocable trust does not get a step-up to Fair Market Value and the depreciation recapture liability transfers to the beneficiary.

Rev Rul 2023-2

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