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Capital gains

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Taxing Matters

Overtaxed Member
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My brother died last August 2019. He lived in California, Tulare county. A few years back he had the deed on his home changed to "The B Xxxxx Trust " which belongs to my husband and I. He had become ill and wasn't sure how much longer he would be alive. He wanted to make sure that his estranged adult children could not get his home so that is why he had the deed changed to our trust name. The mortgage has always been solely in his name and he made the payments. There was never any monies exchanged or any contract between B and my husband and I related to putting the deed in our trusts name. My brother just wanted to make sure my husband and I got the house after he died because we had helped him with personal matters throughout the years. I do have a copy of the deeds which show my brother and his now ex-wife buying the home in 2004 and then after a divorce in 2008 my brother bought his ex-wife out and since then my brothers name has always been on the mortgage with no one else. The question is, "Do my husband and I have to pay capital gains on that home when I sell it?

Taxing Matters

Overtaxed Member
The question is, "Do my husband and I have to pay capital gains on that home when I sell it?
The essential facts that you provided is that your brother was the sole owner of this house and after his divorce he transferred the house to a trust that you and your husband set up (thus you and your husband are the grantors of the trust). This suggests that your brother was not a grantor of the trust. If your trust is a revocable living trust (as most trusts set up in California for estate planning are) then the effect of what your brother did was make a gift of the home to you and your husband at the time he transferred the home to you. What that means for your capital gains question is that you and your husband took the home with the same basis in it that your brother had in the home. That basis would be what he paid for it plus the cost of any improvements to the property he made to the property before the transfer (but not cost of routine repairs) and less any depreciation he had on the property (which would occur if he ever rented it out). So if he paid $200,000 for it, for example, and put on a $50,000 addition a few years later, and had no other basis adjustments when he transferred it to your trust, then you would get it with a basis of $250,000.

After it became yours, you'd also add to the basis any improvements that you added to the property (but again not routine repairs) and reduce the basis by any depreciation (if you had rented it out).

Since he bought it in 2004, my guess is that he paid a lot less for it than it is worth now given how much real estate has gone up in many place in California over the last 16 years. So the short answer to your question is that if you sold it now you very likely would have a substantial capital gain on which to pay tax. The good news is that the federal capital gains rate tops out at 20%. You'd also pay California income tax on the gain, too.

The sticky part here may be that if your brother was living in it after the transfer and paying the mortgage on the place then technically he may be considered your tenant with the mortgage payments being rent. If that's the case then there may indeed be depreciation you'd need to account for (and rental income too).

Had your brother transferred the property to his own revocable living trust and made you the beneficiary or had given you the home in his will the outcome would have been different. In those instances the basis you would get in the property would be the fair market value (FMV) of the home as of the day he died. That would mean little or no capital gain if you sold it today, unless the house went up in value since August.

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