Sale of Rental Property held in Living Trust in California

[Ray2003]

What is the name of your state? CALIFORNIA

Hi, I'm selling my primary residence in Los Angeles and my rental property in Irvine, CA to move to Texas (one of those cliches, I know). My understanding is my primary residence's profits, if under $500K (since I'm married and file taxes jointly with my wife), will not be taxed at all.

However, my question is with my Irvine condo, which I'm renting out now:

1) It is held in a living trust created by my dad. He died in 2015, and I am the only remaining trustee. Do I need to transfer the condo out of the trust to under my personal name in order to sell it and receive the profits?

2) If I transfer the condo out of the living trust and put it under my personal name, would the condo be considered a short-term investment or long-term one (i.e., would the IRS consider ownership of it stemming from 2015 when I became the sole trustee, when my father passed away, or 2021 when I transfer the title--assuming I even need to do step 1 above, I mean)?

Any help would be appreciated! I am trying to save on taxes! Thank you!

 

[quincy]

What is the name of your state? CALIFORNIA

Hi, I'm selling my primary residence in Los Angeles and my rental property in Irvine, CA to move to Texas (one of those cliches, I know). My understanding is my primary residence's profits, if under $500K (since I'm married and file taxes jointly with my wife), will not be taxed at all.

However, my question is with my Irvine condo, which I'm renting out now:

1) It is held in a living trust created by my dad. He died in 2015, and I am the only remaining trustee. Do I need to transfer the condo out of the trust to under my personal name in order to sell it and receive the profits?

2) If I transfer the condo out of the living trust and put it under my personal name, would the condo be considered a short-term investment or long-term one (i.e., would the IRS consider ownership of it stemming from 2015 when I became the sole trustee, when my father passed away, or 2021 when I transfer the title--assuming I even need to do step 1 above, I mean)?

Any help would be appreciated! I am trying to save on taxes! Thank you!

Your best option is to seek help locally from a tax attorney, who can personally review your financial situation and advise you accordingly.

That said, I have flagged the forum’s tax professionals to see if they can provide some limited advice.

@Taxing Matters
@LdiJ

 

[LdiJ]

What is the name of your state? CALIFORNIA

Hi, I'm selling my primary residence in Los Angeles and my rental property in Irvine, CA to move to Texas (one of those cliches, I know). My understanding is my primary residence's profits, if under $500K (since I'm married and file taxes jointly with my wife), will not be taxed at all.

However, my question is with my Irvine condo, which I'm renting out now:

1) It is held in a living trust created by my dad. He died in 2015, and I am the only remaining trustee. Do I need to transfer the condo out of the trust to under my personal name in order to sell it and receive the profits?

2) If I transfer the condo out of the living trust and put it under my personal name, would the condo be considered a short-term investment or long-term one (i.e., would the IRS consider ownership of it stemming from 2015 when I became the sole trustee, when my father passed away, or 2021 when I transfer the title--assuming I even need to do step 1 above, I mean)?

Any help would be appreciated! I am trying to save on taxes! Thank you!

The fact that you are the only remaining trustee matters, but who is the beneficiary of the trust matters more. It also matters whether or not the condo is the only asset in the trust. If the condo is the only asset in the trust and the trust will cease to exist once that asset is sold, then the trust can pass any profits from that asset along to the beneficiary(ies) via Schedule K1 and the profits can be taxed at their rates rather than trust rates.

You would likely benefit from a consult with an attorney who deals with trust matters. I think that a tax attorney could be overkill at this point. Consulting a tax professional would be beneficial once you have consulted with an attorney who deals with trust matters.

 

[Taxing Matters]

1) It is held in a living trust created by my dad. He died in 2015, and I am the only remaining trustee. Do I need to transfer the condo out of the trust to under my personal name in order to sell it and receive the profits?

No, there is no requirement that you do that and so long as the trust distributes sufficient assets from the trust to the beneficiaries in the same tax year as the sale of the property then, as LdiJ points out, the income passes through to the beneficiaries and ends up on their individual return and the trust doesn't pay income tax on it. That's important because the trust rates are more progressive than the individual rates and thus likely more tax would be paid if the trust has to pay the tax.

The key here is to make sure you time the distributions so that they occur in the same tax year as the sale. Having the trust sell it and then distributing the proceeds is generally going to be easier and have less risk for screw ups than doing a two step process of distributing the property itself to you and then selling it. Assuming you are the only beneficiary of the trust the federal and California income tax result of those two alternatives is the same.

What I can't tell you is what property tax implications there may be if you distribute the property from the trust to yourself and then sell it. That might trigger a reassessment and if so, you might end up paying some extra property tax. California has some complex rules on property thanks to several propositions passed by voters over the last 50 years or so, and I don't practice in that state. So if you really want to consider distributing it to yourself before the sale, I'd urge you to see a tax attorney or other tax pro that practices in the area of California property tax.

2) If I transfer the condo out of the living trust and put it under my personal name, would the condo be considered a short-term investment or long-term one (i.e., would the IRS consider ownership of it stemming from 2015 when I became the sole trustee, when my father passed away, or 2021 when I transfer the title--assuming I even need to do step 1 above, I mean)?

Again, assuming you are the sole beneficiary of the trust, if the trust distributes the property to you then you'll generally take the property with the same basis in it that the trust has. So either way, when you sell the property the gain will be the same. (There are some less common situations that could change that, so again if you want to distribute the property first, see a tax professional to review the details of the trust to determine what impact going that route will have.) If I assume that this was a revocable living trust set up by your father then the property would have gotten a basis equal to the fair market value of the property on the day he died. Then from there the basis will be adjusted downward for depreciation and upward for capital improvements made to the property. There may also be less common adjustments to basis. The basis of the trust assets does not change at all in the trust when a beneficiary or trustee dies or changes. Nor will distribution result in a step up in basis.

The bottom line for income tax is that, absent something unusual, you're not going to get a better income tax result by distributing it to yourself first and then selling it rather than having the trust sell it and then distribute the proceeds in the same tax year. [/QUOTE]

 

[zddoodah]

my Irvine condo, which I'm renting out now:

1) It is held in a living trust created by my dad. He died in 2015, and I am the only remaining trustee. Do I need to transfer the condo out of the trust to under my personal name in order to sell it and receive the profits?

No. Assuming the property is titled in the trust's name (which "held in a living trust" implies, but there is at least one other plausible interpretation) and you are the trustee of the trust, then you would sign the grant deed in your capacity as trustee. The net proceeds of the sale would be an asset of the trust, not your personal property (that could be a meaningless distinction, but we obviously have no idea what the trust instrument says).

Defer to others on the tax issues.