Third year of Trust, sold a house last year, still not ready to disburse

[P_Ohana]

My hubby's parents have a trust since 2011. They both passed away in 2023, with my hubby as sole trustee. The trust owns homes in Illinois and Wisconsin. We live in Colorado. The homes were appraised at the time of the parent's deaths. The Wisconsin home was sold September of last year. It had had hail damage in May/June of last year. The proceeds from the sale were placed into an escrow account because of my SIL (his sister-they are not close) and hasn't been disbursed to the Trust yet. 

The trust has income from an annuity and expenses for the homes and legal/professional fees. I did the Trust tax return last year.

How does is sale of the one home treated from a taxation basis? The home has been i the family since the 50's and has no debt. It wasn't used as a rental, it's just a second home that his sister lived in, rent free.

[Hi Palms]

The home was used for personal purposes so it's a standard second home type of thing. The trust would report the sale on its 1041 and the gain would be the difference between the sales price less selling expenses less the trust's adjusted basis......that basis would be the FMV on the date the last parent died in 2023.

The trust can either pay income tax due or distribute the proceeds to the beneficiaries depending on the terms of the trust.

[ReneV4 · Accepted solution]

There might be a complication due to substantial limitations or restrictions since there is a legal dispute holding up the funds. 

According to the IRS (and specifically 26 CFR § 1.451-2), income is not constructively received if your control of its receipt is subject to limitations. If your husband, a Trustee, cannot legally withdraw the money because of the dispute, the trust has likely not "received" the income for tax purposes yet.

If there are legal barriers preventing the trust from accessing the funds, the proceeds and the gain or loss, may not be recognized for tax purposes until the dispute is resolved and the funds are made available to the trust. This is something you will need to look into further.

For the basis, even though the home has been in the family for many years, the trust will use a "stepped-up" basis, which means the starting basis for the Wisconsin home is its fair market value on the date of the parents' deaths in 2023. The damage due to hail might affect the basis. Increase your basis for any out of pocket costs the trust spent.

To calculate the gain or loss, you subtract the property's adjusted basis from the proceeds of the sale (gross sale proceeds, minus selling expenses, commissions and legal fees tied to the sale).

[P_Ohana]

Thank you so much!

My hubby is working on an agreement with his sister. It sounds like we need to ensure that the agreement covers the release of the escrow funds. He was hoping for a simple agreement to divide the remaining assets with her keeping the remaining house and him keeping the cash and dividing the sale proceeds in half. So I can run a back of the envelope calculation of what the taxable income should look like and factor that in. But it sounds like it will not be an issue for the 2025 tax return.

[Hi Palms]

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@P_Ohana wrote:

But it sounds like it will not be an issue for the 2025 tax return.

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It won't be an issue for 2025 unless the closing agent issues a 1099-S to the trust for 2025.

[P_Ohana]

I asked him if he received a 1099. He said he didn't recall receiving one. Finances aren't his strong suit. We will check.

[P_Ohana]

Last question - when the funds are disbursed to the Trust, its should be a LT Capital Gain. What's the LT Capital Gains rate for a trust? He needs to know how much $ to allocate to pay this tax. I assume that closing costs can be "deducted" against the sale or added to the basis and reduce the gain.

[Hi Palms]

The trust can deduct the selling expenses.

Long term capital gain is taxed at a maximum rate of 20%. It's graduated but gets to that level quickly with a trust.

[P_Ohana]

So I did the Trust return on TT. I included the sale of the property. At one point, TT asked if a 1099-S was received. We answered "No". It looks like we are still on the hook for the Capital Gains tax for 2025. That's not a huge deal. It can be paid.

But if the 1099-S gets issued this year, in 2026, how will that affect the TY '26 return?

That's definitely what the IRS looks at for income and there will be none of that type declared for 2026. We obviously don't want to be billed for the same tax two years in a row.

Did I make a mistake? Hubby will check with the Trust/Escrow company that handled the property sale closing to make sure that our assumption about the 1099-S not being issued is correct.

BTW, I answered in TT that the Trust uses a cash basis for accounting, which is true since there is no CPA running it. Just my non-CPA hubby and there isn't anything to accrue.

[P_Ohana]

Post script - he called the Title/escrow company. They said they did issue a 1099 this year after all. He was able to get a duplicate so we can now wrap things up in regards to the sale of the house.