My mother had a trust, and when she passed away, me and my brother sold her house; do I have to pay taxes on my share of the proceeds?
My mother had a trust, and when she passed away, me and my brother sold her house. We divided the proceeds. Do I have to pay taxes on my share of the proceeds?
The tax impact of the sale of the home will depend on the type of Trust your Mother established.
If the Trust was a Revocable Trust then the home was likely includable in your mother’s taxable estate. If that is the case, at her death the home received a step-up in cost basis. This means that the cost-basis of the home reset to the home’s market value as of your mother’s date of death. As a result, there would likely be very little, if any, taxable gain for you to report as income.
Alternatively, if the home had been placed in an irrevocable trust, like a Qualified Personal Residence Trust, before your Mother’s death it likely would be excluded from her taxable estate and therefore, not receive a step-up in cost basis. The difference between what was paid for the house and what it was sold for would create a capital gain. If the proceeds were then distributed from the Trust to you and your brother you would each pick up that taxable gain on your personal income tax return.
Ughh - I'm sure you're going to hate my answer - but "It Depends!!"
Trusts come in all shapes and sizes. Not knowing the whole story, it's difficult to offer tax planning advice. My recommendation is to start by reaching out to the attorney who helped close out the trust.
First let's assume that the trust held title to the house. (If it didn't, then getting the proceeds distributed to the heirs is a whole different question.) The cost basis of the house is stepped up to its value on the day she passed away. If you sold the house within a short while, tax law sets the date-of-death value as the net proceeds and there will not be any taxable gains.
However, if her total estate including the house was valued at more than $5.45 million (if she died in 2017) or $11.2 million (if she died in 2018) then the estate is subject to estate tax. Consult your mother's attorney to get this handled, if necessary.
Without knowing the finer details of the Trust & what type of Trust it is - Revocable or Irrevocable - I can't say for sure. That said, I am assuming it is a Revocable Trust which really just avoids probate & still went under your Mom's social security number. If that is the case, then all of her estate gets a "step up" in basis to the Fair Market Value (FMV) as of the date of death (or possibly 6 months thereafter). Point is, that you need to determine the FMV at that date and that would be your new cost basis, not what she paid for the house years ago. So you might have some small capital gains which is the difference between the selling price and your cost basis, but it will likely be much less than you might imagine if anything.
Now if it is an Irrevocable Trust, that is an entirely different story with more variables. I think you would have known that and based upon the way you asked the question, I am fairly confident it is a Revocable or Living Trust. But please verify.
Hope this helps and best of luck, Dan Stewart CFA®
If the trust owned the house, the trust will pay the taxes out of the proceeds before distributing the net to you and your brother. But there most likely would be a "Step-Up" in basis, meaning apon your mother's death the home would have a basis of the value on the date of her death. If you sold it for more than the value on that day the difference would be the taxable amount. If you sold it for the same or less value as it was on the day of her death, there will be no taxes owed.