I could use some advice please;
House purchased in 1989. House was put into IRREVOCABLE living trust in 2007, but no appraisal done. House was sold in early 2019. No distribution made to beneficiaries (children of owner) as owner was still alive until end of 2019. I have received interest income 1099-Int. I must file a return for the trust for the first time, so I need to calculate gain on sale of the house. I have receipts for improvements since 2007, but don't have an appraised value of the house at the time it was put into trust. Is there a means to estimate it without running afoul? Also, once these gains have been taxed and we divide the trust up among beneficiaries (only the house sale proceeds are in it), do the beneficiaries have a tax liability for this inheritance since it is from a trust not an individual? This tax stuff is enough to make a sane person crazy... Thank you!!
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I am sorry for your loss.
The Cost Basis for the house would be the Market Value at Date of Death, plus any improvements and sales costs associated with fixing the house up and selling it.
The trust would pay any tax on the Gain, and the beneficiaries would pay tax on their individual shares.
Click this link for detailed info on Selling an Inherited House from a Trust
You actually need to get some professional tax and legal guidance for this scenario.
First, you have to realize that, generally, a transfer of property by a grantor to an irrevocable trust (depending upon the terms of the trust itself) constitutes a gift to the beneficiary(ies). As such, in many instances the donor/grantor would be required to file a gift tax return for the year in which the transfer occurred.
Next, assuming this transfer was actually a gift, then the basis would be bifurcated. The basis for figuring a gain would be the same as the donor's adjusted basis while the basis for figuring a loss is the fair market value of the property on the date of the gift. You would be able to add the cost of improvements to your basis, of course.
Further, it is important to understand that the beneficiaries have not "inherited" anything; they are simply the beneficiaries of a gift. The grantor/donor is still alive.
Finally, I would urge you to (a) get professional tax/legal guidance with respect to this situation (again) and, (b) get an appraisal from a licensed (certified) appraiser for the value of the property in 2007 (and also in 1989 if the basis is not available).
Thanks @Anonymous_ Tagteam.
A couple of clarifications however... the grantor also died in 2019, albeit several months after the sale of the home within the trust.
And are you saying that there is a means used by a certified appraiser to put a value (retroactively) to 2007?
The trust expressly stated that while the grantor was alive, its interest was to be used for 'the support, maintenance, health and happiness' of the settlor. The principal, upon her death, was to then be distributed to her children.
Does this change anything wrt your answers? I agree, I think I want professional help on this one.....
@spittybug wrote:And are you saying that there is a means used by a certified appraiser to put a value (retroactively) to 2007?
Yes. An historical appraisal can be done and it is optimal if done by a certified appraiser (licensed in the state in which the property is located); this is the most conservative approach and one that is almost universally accepted by the IRS.
@spittybug wrote:The principal, upon her death, was to then be distributed to her children.
You do need a professional who can read and evaluate the trust, but it does appear as if the beneficiaries may actually get a stepped up basis if the grantor retained the right to use the property exclusively until her death. That would be similar to drafting a deed with a retained life estate.
The foregoing notwithstanding, you should seek professional help with this scenario as there are quite a few variables.
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