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If property held in a family irrevocable trust is sold upon termination of that trust - is there a capital gains due on the $ amount received?

We have been told no capital gains needs to be paid because the $ amount was considered a gift. Any information on this topic would be greatly appreciated. Than You.

Beth
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<If property held in a family irrevocable trust is sold upon termination of that trust - is there a capital gains due on the $ amount received?>

Somebody or something must pay taxes on the gain. If the property was sold after the trust was terminated, your basis in the property is the same as that of the trust and so you will have a gain to report. If the property was sold by the trust, the trustee has the choice of having the trust report the income and pay the taxes or passing the income to the beneficiaries and having them report the gain and pay the taxes. The only way to avoid having somebody pay taxes on the gain is to die owning the property and the heirs get a step up in basis to the date of death value.

Choc
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Choc,
Thank you so much for your response. I was pretty certain that a gain would have to be reported even though I had been advised differently. Thats what prompted my post to this board.

The gain came about because of the sale of two seperate houses. It was divided into thirds between siblings. I do not know for sure though if the trust reported it or not. That I will have to look into. Trying to decifer the trust is a pretty complicated matter. Thanks for the information. I now have a little researching to do.

Beth
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Choc wrote:
> The only way to avoid having somebody pay taxes on the
> gain is to die owning the property and the heirs get a step up
> in basis to the date of death value.

Nitpicking, but won't the gain in that case be subject to estate tax? Although in most cases there won't be any tax due due to the unified credit (basically a standard deduction for estate tax, which I think is $1,000,000 at the moment.

-CB
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<The gain came about because of the sale of two seperate houses. It was divided into thirds between siblings. I do not know for sure though if the trust reported it or not. That I will have to look into. Trying to decifer the trust is a pretty complicated matter. Thanks for the information. I now have a little researching to do.>


You are a little light on the details, but you should report according to whatever information is provided on the K1. Hopefully all of this was set up professionally and not done as a DIY trust. A trust does does not have to be so complicated, but clear communication from the trustee to all the beneficiaries is essential. It does not appear to have happened here. If this is for 2002, it is kind of late in the game. Good luck.


BRG
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Choc,
I'm not really that knowledgeable in this area thus the posts to the board. The person whose name this trust was set up under has not died. She is in the latent stages of Alzheimers. The trust has been dismantled and property sold.

Beth
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BRG,
No this was not set up as a DIY trust. However the trustee named in this trust communicated only through mailings never one on one with the beneficiaries. To this date I am still not very clear on all the details. I believe the trust was set up because the woman whose name is listed on the trust was diagnosed with Alzheimers (now in the latent stages of the disease). Both her primary residence and summer home was put into the trust. She currently resides in a nursing home she has not passed on. The trust was dismantled and the two houses sold and dollars divided between the three siblings. Thats all the information I have.

What is a K1 and also what is a 1031 exchange. I was told a capital gains might be avoided if the property was disposed of under a 1031 exchange.

Beth
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Choc wrote:
> The only way to avoid having somebody pay taxes on the
> gain is to die owning the property and the heirs get a step up
> in basis to the date of death value.

Nitpicking, but won't the gain in that case be subject to estate tax? Although in most cases there won't be any tax due due to the unified credit (basically a standard deduction for estate tax, which I think is $1,000,000 at the moment.


No. The entire value at death is subject to estate tax, not the gain (or loss). If the total value of all assets, net of liabilities, is less than $1M, not federal estate tax is due. State rules may vary.

Ira
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< I was told a capital gains might be avoided if the property was disposed of under a 1031 exchange.>


That may be true, but I do not see how it would apply to a trust being liquidated. The 1031 exchange would be based on the same entity acquiring a similar property within a well defined time period.

How long was the trust in force? You mention the original property owner as being in a nursing home with Alzheimers. If medicaid was being counted on to provide payments there is usually a 3 year lookback on disposition of assets. If other assets were being used to pay the costs or if this was done more than 3 years ago it should not be an issue. Others here may correct me if I am wrong on any of the details.

The K1 is the standard reporting mechanism used to report any income or deductions to any benficiaries. I would hope that the trustee is reliable enough to know what they are supposed to do. The beneficiaries are certainly entitled to a much clearer explanation than they have been given so far.


BRG
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