selling house that is still inside the Living trust that the Grantor has died 10 years ago

[addson2title]

What is the name of your state? CA

I have a friend selling house that still inside the Trust. She is both the successor Trustee and Beneficiary of her father Living Trust. Her father has already died 10 years ago but she did not transfer the house to her own name. Now she is selling this house and at the same time buying another one within the county. She also wants to use Prop 13 to keep the property tax of the new house same as the old house.

What is the best way doing it?

1. Will she have to pay capital gain tax if she sells the house inside the Trust?
2. Should she transfer title of the house to her name and sell to use Prop 13 to keep the low proper tax?
3. If so, what is the right way to do it? Can she do it in Escrow? Does she need a lawyer to do the transfer?


Thanks

 

[Zigner]

What is the name of your state? CA

I have a friend selling house that still inside the Trust. She is both the successor Trustee and Beneficiary of her father Living Trust. But her father already died 10 years ago but she did not transfer the house to her own name. Now she is selling this house and at the same timing buying another one within the county. She also wants to use Prop 13 to keep the property tax of the new house same as the old house.

What is the best way doing it?

1. Will she have to pay capital gain tax if she sells the house inside the Trust?
2. Should she transfer title of the house to her name and sell to use Prop 13 to keep the low proper tax?
3. If so, what is the right way to do it? Can she do it in Escrow? Does she need a lawyer to do the transfer?


Thanks

Yes, she should speak with a pro.

 

[FlyingRon]

She should get a step up in basis to the value at the time her father died. She will owe capital gains on any appreciation since then.
If she's going to sell, prop13 is pretty immaterial to her. The new owner will definitely get a reassessment to the current value.
If the trust transfers it to her, she should still be getting the prop13 defense against a full reassessment.

Whether she takes ownership of the house or the trust sells it and gives her the proceeds, I'd recommend an attorney. This is more complicated than a simple real estate sale. There are attorneys that can handle both the trust and the sale issue together.

 

[Zigner]

If she's going to sell, prop13 is pretty immaterial to her.

If one is old enough, one is able to "transfer" the prop 13 exclusion amount to a newly purchased property - that's why the question comes up.

 

[addson2title]

She should get a step up in basis to the value at the time her father died. She will owe capital gains on any appreciation since then.
If she's going to sell, prop13 is pretty immaterial to her. The new owner will definitely get a reassessment to the current value.
If the trust transfers it to her, she should still be getting the prop13 defense against a full reassessment.

Whether she takes ownership of the house or the trust sells it and gives her the proceeds, I'd recommend an attorney. This is more complicated than a simple real estate sale. There are attorneys that can handle both the trust and the sale issue together.

FlyingRon,
Thanks for your comment. I was referring to the Capital Gain Exclusion, if she owns and lives in the house for 2 years, then she can exclude. Since the house is not in her name, I think she can't exclude the gain?
Regarding the prop 13, because she does not transfer the title to her name, so she can't transfer her's father basis value at death (Assessment value) to her new house, am I correct? That's why I think she should transfer the Title to her name before selling the house. But if she transfer the title today then the Assessment Value will be at today Market anyway, is that right?

 

[addson2title]

If one is old enough, one is able to "transfer" the prop 13 exclusion amount to a newly purchased property - that's why the question comes up.

Yes, she is over 60.

 

[Zigner]

The absolute BEST advice you can give you friend is to speak to a pro.

 

[LdiJ]

The absolute BEST advice you can give you friend is to speak to a pro.

I agree, the situation is a little convoluted and with that whole property tax thing thrown in, she needs to be certain that the trust also allows her to do everything she wants to do.

I am working with one trustee/trust right now that is the most complicated thing I have ever seen.

 

[Taxing Matters]

What is the name of your state? CA

I have a friend selling house that still inside the Trust. She is both the successor Trustee and Beneficiary of her father Living Trust. Her father has already died 10 years ago but she did not transfer the house to her own name. Now she is selling this house and at the same time buying another one within the county. She also wants to use Prop 13 to keep the property tax of the new house same as the old house.

What is the best way doing it?

1. Will she have to pay capital gain tax if she sells the house inside the Trust?

The details of the trust matter. If the trust qualified as a grantor trust under the Internal Revenue Code (IRC) then when her father died the property's basis was adjusted to be equal to the fair market value (FMV) of the property on the date he died (or on the alternate valuation date 6 months after he died in the rare event that the estate was subject to federal estate tax and the executor made the election for the alternate valuation date). If the trust was revocable by the father during his lifetime then it was a grantor trust (there are other trust powers that can make a trust a grantor trust, too). But even if this was a grantor trust and thus the basis adjustment occurred there is the gain over the last 10 years to account for.

As the property is now in an irrevocable trust, the trust is the legal owner of the property and thus if trust sells it she won't be able to exclude any of the gain under the rule that allows the exclusion of up to $250,000 of gain on the sale of your principal residence. To qualify to do that, she had to both own the property and live in it for at least 2 of the 5 years immediately preceding the sale.

If both properties are investment/commerical property then she might be able to defer the gain by doing a like-kind exchange. She'd want to see a tax attorney who does like kind exchanges for help with that because the rules are pretty strict in how it must be done to avoid triggering the gain.

As for the California property tax and Prop. 13 issues, I recommend she see a tax attorney in CA familiar with that state's property tax rules as they can be a bit complex and if she doesn't get it right it can cost her.

 

[addson2title]

Thanks for your detail explanation!

It looks like that she can't exclude the CG tax because the Trust currently owns the house.

Can she still use Prop 13 to carry the same Cost of Basis (FMV of the house when her father died) to avoid Reassessment to keep the low property Tax?

 

[LdiJ]

Thanks for your detail explanation!

It looks like that she can't exclude the CG tax because the Trust currently owns the house.

Can she still use Prop 13 to carry the same Cost of Basis (FMV of the house when her father died) to avoid Reassessment to keep the low property Tax?

Again, she needs to see someone local who can review everything and make sure what she can and cannot do.

 

[addson2title]

Can she do 1031 Exchange at all?

 

[FlyingRon]

A 1031 is only for investment/business properties. It appears that neither she nor the trust had any "investment" motivation here.

 

[addson2title]

I see. Thanks