Sale of primary residence in a Living Trust

[Mikehs]

I think I've got the answer for this from reading other posts on the subject, but need to know which software to purchase.  Sister in law's spouse created a Living Trust and transferred the deed to his home to the trust. He is now diseased.  We needed to set up Trust account (at Wells Fargo with EIN) to receive the proceeds from the sale.  Since they lived there 20 years as their only residence, and the proceeds were more than $500k (She is now single).  She used a 95% of the money toward her new home.

1. Am I correct in assuming that these proceeds ($250k) still qualify for the home sale exclusion / Exemption?
2. Also which TAX software is needed to file Trust sale (with EIN). I always use Home & Business. If Separate software is assumed, Is this mean 2 separate returns (one for Trust / one for personal) ?

Thank you.

[Mike9241]

the information provided is a little confusing. So, let's see if I understand correctly. He owned 100% of the residence and deeded it to a living trust.  He died.

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Thus 100% of the value of the house is stepped up to Fair Market Value.  At death, the trust would become irrevocable. So when the trust sold the house it had a gain/loss of the sales price less selling expenses less the FMV. There is no home sale exclusion for an irrevocable trust. Now, if there is a gain because the house has appreciated more between the date of sale and death, the trustee must decide whether to pay the tax on the gain at the trust level or pass it out to the spouse on a k-1. For the trust, you need Turbotax Business - windows only computer - 64-bit operating system windows 10 or later.

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I'm assuming she was not a co-owner because you use this phrase "transferred the deed to his home to the trust". if she was a co-owner of the house when transferred to the trust the answer could change.  

[Mikehs]

Thank you for your reply.  All is assumed correct. The spouse was not a co-owner of the trust but a grantor & also became an irrevocable trust at time of death. 

These was a capital appreciation of $600k from time of purchase to time of death of the spouse.  I helped her get EIN in order to open account at Bank to access proceeds. 

Do we file taxes for the trust separately as its own entity ( Is the $250k deduction for exemption apply).

The software (Turbo tax for Business) supports additional help for deductions. 

Do I still need to purchase the regular Premier version to do a personal tax return for her as well ? 

Since this is in California, Do we need a separate return for State (trust). Does it come with the Federal version ?

Your reply is much appreciated. 

[Mike9241]

How did the spouse who did not own the home become a grantor of the trust? I could not find any information on whether a spouse can be a grantor to their spouse’s trust.

There is no home sale exclusion for an irrevocable trust. 

Once the trust becomes irrevocable it must file if it had gross income of $600 or more or any taxable income. 

Turbotax business is needed for the trust. I see that for 2023 online versions wiyth pro assistance or preparation are offered

https://turbotax.intuit.com/lp/ppc/4940  price 489- 1169 state additional

desktop version without professional assistance. your computer must have a 64-bit operating system windows 10 or up and be a full PC or MAC. 

https://turbotax.intuit.com/small-business-taxes/cd-download/  price180 state addition 

Most likely a trust return must be filed for California if Fderal is required

[Mikehs]

Correction, meant to she is listed as trustee on the trust. So if filing the sale as a irrevocable trust, she does not get the $250,000 exclusion ? Wonder how people do this to protect and still get the exclusion. 

I will have her make the decision which program to purchase. Thanks again. 

[Mike9241]

there is a step up to Fair Market Value which should eliminate most of the gain if sold shortly after his death. 

the problem I saw was that the irrevocable trust and not an individual as required by section 121 sold the property. however,  I found that under certain conditions that weren't specified the IRS may deem her as the beneficiary and the trust to be one and the same and thus she would be deemed the seller so the trust would qualify for the HSE. check with a tax pro because state law may affect the results.