I have a bit of a complex scenario:
My parents purchased their home in 2005 for 1, 350,000.
My mother passed away in 2016, and my father had the home retitled into his name.
He created a revocable living trust in 1995 (he is the Grantor) which he revised in 2021, naming myself and him as co-trustees. There have been no assets in the trust until this property passed into it.
He signed a quit claim deed in October of 2018 deeding the property to his living trust (which wasn't filed until 4 days after his death by his lawyer)
He left a mortgage on the home, of 550k, for which I have been paying since 2022 from my own funds (180k) hoping the market would improve the sale opportunity. I never took any deductions for the mortgage interest. It slipped my mind to update the name on the mortgage, and his name remained on it until payoff at closing.
My understanding of this situation would be that since the property was part of his estate on his date of death, (despite the document stating 2018 on it), the county recording transferring into the trust legally 4 days later, results in the step-up basis valuation date to be the FMV at time of death (or 6 months later)
This is problematic for me because the real estate market wasn't doing so great in 2022 (likely sale price of 1.1-1.2) and I elected to hold onto the property to sell in the summer of 2025 (for $1.4).
In spite of the title company issuing a tax for indicating distribution of 1,400,000 to me, I only truly received around 750k after remaining mortgage payoff and closing costs+commission.
1) Does the trust have to pay capital gains on 1.4 - FMV on death even if it's lower than the initial purchase price in 2005? (Would have to pay gains on 300k - closing costs/commission.. so 220k)
2) Can the 180k I spent maintaining the mortgage/home be billed to the trust to deducted as an expense associated with the home to effectively reduce the capital gains owed? ( or can you only deduct major upgrades/changes to offset basis)
3) Is there any way in which I can use the initial home purchase price in 2005 (1.35) as an alternative valuation? or even the FMV in 2018 based on the date the deed was actually signed (even though it wasn't recorded)? (FMV around 1.6)
To me- this looks like a scenario where I get screwed into owning capital gains on the difference between 1.4 -(closing costs + commission) -1.1, instead of breaking even on 1.4 (minus closing costs)-1.35 if I don't have to apply the step up basis FMV date.
The title company issued a tax form to the trust indicating 1,400,000 in proceeds were distributed to the trust. (Reality is that the trust received 750k wired after payoff of the mortgage and closing costs + commission).
The initial price in 2005 was 1,350,000 and FMV around time of death in 2022 was 1,100,000-1,200,000 provided by realtor.
I have a singular distribution of 500k to make from the trust after pay off of capital gains from the sale, (this is the only asset), and then I will distribute the remaining amount to myself to reimburse myself for the mortgage payments before I close the trust.
Am I missing something re: the FMV date I am required to use?
