I lost my dad in April. I and my nine siblings have been share-and-share-alike beneficiaries of the revocable trust he had set up with my mom (d. 2009) in the '90s, with my sister as the executor/trustee. I have no questions about any aspect of the Trust except for the home which they purchased in 1964, and is possibly to be sold by the end of the month.
The original purchase price of the home was $40K. The highest offer currently being considered is $830K. Let’s for the moment consider the costs associated with the sale as taking the realized price as $790K. Subtracting the $40K purchase price brings us to $750K.
Now, I did a little googling around and found that a $250K exclusion is allowed ($500K if the seller is married). Is an exclusion applicable when the sale is being conducted from a revocable trust? And if so, is it the 250K exclusion or the 500K one?
Another thing is the question of exclusions for improvements made to the property. In the late '60s, Dad paid a contractor to add a second story to the house, above the garage. And in the early '70s, he himself added a family room extending into the backyard. I’m not sure how much those set him back (although he was a meticulous record-keeper, and I’m pretty sure my sister has the information). After this much time, do those improvements qualify for exclusion from capital gains?
Would it fall under estate tax? That’s over $1 million exemption IIRC. If the home sale amount goes into the trust, and is less than the exemption, might not be any tax owed. I’m not an estate lawyer.
The $250k/$500k exclusion is not applicable to these circumstances, it’s only applicable when a (living) person sells their primary residence. However, if a property is inherited, the cost basis is “stepped up” up to market value at the time of inheritance. So if you inherit it and sell it immediately, there is no capital gain. The more relevant issue for taxation is whether the entirety of the estate (at current market value, not cost) exceeds the estate tax exemption, currently over $5 million.
This is the simplistic situation, but with a trust involved, it sounds like you need professional advice on the details of your situation. But, to relieve your basic concern, I don’t think you have a large cap gain liability that’s calculated from the $40k original cost of your father’s house.
Broadly speaking the point of taxation is to tax profits. Not to tax revenue.
Any improvements go to increase the cost. The tax folks call this “basis.” IOW if he paid $40K for the house and later spent $20K on an addition, the final taxable profit on sale is the actual sale price, less selling expenses, less the (40+20=) $60K basis.
There is a distinction between “improvements” which go to basis and “repairs” which do not. So $10K spent on a roof in 1980 would not be an addition to basis.
Clearly there’s room for gray areas and cheating here. But a meticulous record keeper should be able to make some dent in the taxable gain.
I’ll defer to a pro for the other questions.
ETA: **Reimann **is right about stepped-up basis for a straight inheritance with no trust involved. If they’d deeded the house to the trust years ago there’s more complexities. Get a pro. Tax experts are stupid cheap compared to attorneys or doctors. This is not the place to go cheap Charlie.
Well, my sister is the actual Trustee, and she’s been doing a stellar job of looking out for all of our interests. I have complete faith in her ability and intention to handle this, and she has a really good lawyer and financial advisor working on it.
I’d ask her, but I don’t wish to take up her time right now, as the people who have made the best offer so far (10K above asking) are requiring a response ny the end of the day. The next best offer ($500 above asking) want an answer by the end of tomorrow. She’s also got her own full-time job to so, do I think it’s best if I don’t take up any of her time with questions that she’ll be getting around to at any rate.