Step-up basis or CMA? Owner died years ago, gain or loss?

[NaySao]

I am in a complicated situation (for me), suddenly becoming successor trustee of three trusts in California and having to file both federal and state personal taxes for the recently deceased (will be using TurboTax for this) as well as all three trusts (TurboTax Business?). I understand all the trusts are now irrevocable, but they were all revocable living trusts originally. I am attempting to do all the taxes myself but it is overwhelming. I have two primary questions that I need assistance with, please, one for a trust and one for the final personal taxes I'll need to file for the individual.

To summarize the details:

- initial homeowner (trustee/trust) passed away in June 2014 and the deed remained in the trust's name until it was sold in December 2023. (I am trying to figure out how to calculate historical value for this date for step-up basis, in case it is needed.)

- this trust granted a Life Estate or Living Estate to the son (co-trustee), who could access money and live in the house for the remainder of his life - and he passed away in 2023 - at which point all assets were to be liquidated and given to charity beneficiaries.

- we received a (sight unseen) CMA three weeks after the son's death in 2023, with a value of ~$365,000.

- house was actually sold for $320,000 due to extensive necessary repairs.

- the son also withdrew several thousand dollars from the trust's bank account over the 2023 tax year.

My questions:

- I understand I will have to report the house sale as a gain or loss. How do I calculate the gain or loss? Do I use the step-up basis from the trust owner / home owner's death in 2014, or the CMA from when the son passed away and the house was sold?

- Do I need to report the son's withdrawals from the parent's trust bank account on his taxes as a form of income? Or are these considered a tax-free inheritance?

Thank you so much for your time!

[Mike9241]

- I understand I will have to report the house sale as a gain or loss. How do I calculate the gain or loss?

the son was a remainderman under his parent's trust agreement. when the parent died the son became the owner so the basis to use is the FMV on the date of death of the son. I can see no reason to need a 2014 valuation.

Do I use the step-up basis from the trust owner / home owner's death in 2014, or the CMA from when the son passed away and the house was sold?

do you request or pay for the CMA? it may be worthless because the valuation should have been what the property could sell for. I can go on many websites and get valuations for property but sight unseen they're worthless when it comes to taxes.  To protect yourself since using the CMA would result in over a $100K loss if you didn't pay for it, you should get a certified appraisal from a qualified expert.  Your the one signing the return 

- Do I need to report the son's withdrawals from the parent's trust bank account on his taxes as a form of income? Or are these considered a tax-free inheritance?   

this question can't be answered because we don't know what the trust provided for in the way of distribution of income. The son may have only been withdrawing corpus (not taxable) . You may need to see a lawyer to analyze the tryst provisions. The question is what type of returns, if any, were filed for the trust from 2014 through 2023. this process would continue through the son's death. then what happens and tax reporting depended on the trust provisions dealing with the death of the son. 

[NaySao]

Thank you @Mike9241 , I will look at any prior tax returns I can find to determine if he reported these financial withdrawals in the past. I believe he only withdrew on principal, not on income. 

So the house-- even though it was owned by the trust and never transferred to the name of the son, he only lived there-- the FMV would be based on the date his death last year? Even though the tax filing will be on the parent's trust and not the son's?

And sorry, I was mistaken, the sight-unseen estimate we received was for $364,407, so we sold it at a "loss" of $44,407. We did not pay for an appraisal due to the biohazardous state of the property, and it is too late to pay for one now since it is already being remodeled.

More specifically, that realtor's report stated the following: Your Comp Analysis - $364,407; Your Comp Analysis Range: $267K – $494K.

I received another emailed statement from a realtor who saw photos of the home and gave me the figures for 1) a local median price per sqft and a $369,750 estimate based on that figure alone, 2) an opinion that an investor would value it at $250,000 (then again, he worked closely with an investor who offered $230,000; and the investor we sold it to purchased it for $320,000).

Any advice you can give would be great. The trust lawyer I consulted told me to consult a tax professional. I'm not sure who to ask at this point.

You stated, "the valuation should have been what the property could sell for," - if I take this literally and claim that the house is worth the exact $320,000 it sold for, would I not have to report the sale to the IRS at all since that would be considered zero gain or loss?

Thank you again.

[Mike9241]

A life estate is a special ownership arrangement that allows you to share a property with someone else. Here’s how it works:

Ownership Interest: In a life estate, each person involved has an ownership interest in a piece of real estate, typically your primary home. However, their ownership rights occur over different time periods:
Life Tenant: The person who holds the life estate is called the life tenant (which would be the father) since he is the homeowner. As the life tenant, you own the property during your lifetime.
Remainderman: The other person (the son) in the life estate is called the remainderman. They have an ownership interest in the home, but they can’t technically own it until thelife tenant passes away. When the life tenant dies,  the home automatically becomes the remainderman (son)
How It Works: Let’s say father owned a home and want to leave it to son. He establishes a life estate deed, designating himself as the life tenant and the son as the remainderman. During the father's lifetime:
he can continue to live in the home.
he's responsible for existing mortgage obligations, property taxes, homeowner’s insurance, maintenance, and repairs.
he can make improvements or even rent out the property.
However, certain actions (like taking out a mortgage loan against the property) require the remainderman’s consent.
Selling the home is also restricted since the remainderman has an ownership interest.
Upon father's death, the property automatically transfers to the remainderman. 

However, what name was on the title? it should have been registered in the name of the life estate or upon father's passing depending on the provisions in the trust, the son's name. 

If properly titled the son would have owned it on the date of his death. the residual beneficiaries/his estate would receive a step-up in basis. if it wasn't properly titled, I would be of no help in giving you an answer as to basis to use. 

how soon after death was it sold? if shortly thereafter I would say the FMV was the gross sales price. but you still have to report it. most likely a 1099-S will be issued for the sale. 

[NaySao]

@Mike9241  Ah, I see where the crossed wires are.

The lawyer I spoke to described it as a Life Estate / Living Estate based on the terms of the trust where the son could live in the house and access the funds while he was alive, and then after he passed away, all assets would be split between charity beneficiaries.

There was no deed that listed owner & remainderman details. The deed was under the name of the parent's trust, with parent and son as co-trustees. The son died with the deed still under the name of the parent's trust. So from my understanding, the home sale will need to be reported as part of the parent's trust. I'm just not sure if I need to use the step-up basis from the parent's death in 2014 (which I still need to calculate somehow), or the CMA from the time of the son's death in 2023 (three weeks apart).

[NaySao]

I have revised my question here:

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/how-to-calculate-gain-loss-for-t...