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tax liability for reverse mortgage form heirs?

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david534

Junior Member
What is the name of your state? california

Situation: A couple of 69 and 64 (in 2006) had a net worth of 6 million USD consisited entirely with very low basis real properties in California. No other assets are worth mentioning. When they takes a 2.5 Million USD loan from their heris. The loan is securied by the real properties of this couple with the following terms: (1) this loan is an interest only loan due in 30 years (and also assumable) and bears an annual simple interest of 8% per year. (2) The couple had the options of deferring the interest payment until the loan is due.

After 15 years. assuming the real properties of this couple is now worth about 10.1 millions USD (about 4% annual appreciation) and the couple both pass away at year 15th. The couple had not made any interest payment during this time and the original loan proceeds of USD 2.5 millions was lost in a bad business investment years before. Assuiming the couple also had no other significant assets to speak of at year 15th. Total loan + interest of this loan is 2,500,000 + 3,000,000 (interest) = 5,5 millions usd. The heirs of this couple inheirted the estate through couple's living trust (with A-B trust options) that preserved the 2 millions USD of the couple's estate tax exemptions.

question (1): what is the couple's taxable estate? Is it 2.6 mil (10.1 mil - 5.5 mil. - 2 mil = 2.6 mil)?

The heirs of this couple now holding the properties of the couple with step up basis and also the original loan/note on these properties with a balance of 5.5 mil that the heirs themselves are the note holder!

question (2): what is the possible tax liabilities (either inccome tax or estate tax) of the heirs in this situation that they now owe themselves 5.5 millions USD?
 
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Dandy Don

Senior Member
If this is not a homework question for a school assignment, then you should really be consulting a professional CPA or income tax accountant to figure out what the liability is. Some of it will probably be exempt but consulting a professional would also give you the advantage of having that person suggest a strategy that would save as much as possible on income taxes.

DANDY DON IN OKLAHOMA ([email protected])
 

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