Capital gains on property in my trust but really owned by my son

[mbf]

Indiana

My son purchased a property in Ohio, but we placed it in the name of my trust to avoid his ex-wife from trying to get it. He did considerable expensive rehab on it, but was then forced to sell it because of extreme financial hardship. In theory, it looks like a huge capital gains because he bought it at a very low price and on paper, it looks like he made a substantial profit. Most of the rehab was done using his own labor, so he doesn't have a record of what his rehab work cost. Anyway, how can we get around the capital gains issue, and who has to pay the tax, him or me? Is there a way that he could absorb whatever the capital gains might be?

 

[LdiJ]

Indiana

My son purchased a property in Ohio, but we placed it in the name of my trust to avoid his ex-wife from trying to get it. He did considerable expensive rehab on it, but was then forced to sell it because of extreme financial hardship. In theory, it looks like a huge capital gains because he bought it at a very low price and on paper, it looks like he made a substantial profit. Most of the rehab was done using his own labor, so he doesn't have a record of what his rehab work cost. Anyway, how can we get around the capital gains issue, and who has to pay the tax, him or me? Is there a way that he could absorb whatever the capital gains might be?

If its in the trust then the capital gain belongs to either the trust or you, depending on how the taxes for the trust are structured.

His labor in this instance is not tax deductible because the trust did not pay him for the labor, and if it did, he would have to pay self employment tax on the labor. Only the materials are deductible.

 

[latigo]

Indiana

My son purchased a property in Ohio, but we placed it in the name of my trust to avoid his ex-wife from trying to get it. He did considerable expensive rehab on it, but was then forced to sell it because of extreme financial hardship. In theory, it looks like a huge capital gains because he bought it at a very low price and on paper, it looks like he made a substantial profit. Most of the rehab was done using his own labor, so he doesn't have a record of what his rehab work cost. Anyway, how can we get around the capital gains issue, and who has to pay the tax, him or me? Is there a way that he could absorb whatever the capital gains might be?

What you need to do is to stop trying to give honorable son financial advice. Because among other misconceptions indicated in your narrative, it is patently clear that you don't have any notion of the difference between legal ownership and the beneficial ownership of trust corpus.

For example, if this so-called "my trust" took title to the property in question, as you claim, then honorable son could not have sold it! Not until it was somehow transferred out of the trust and titled in his name. And if this is a living trust, it would take piles of paper work to accomplish it.

Secondly this business of you naively asking whether or not you personally are obligated for the capital gains simply suggests that you are treating this so-called trust as your alter ego. Meaning it wouldn't stand up against a one eyed, myopic lawyer in spite of your foolish attempt to defraud the ex-wife/daughter-in-law!