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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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Family farm in Irrevocable trust. Do we have to pay ...

Customer Question

Family farm in Irrevocable trust. Do we have to pay capitol gains on income from sale of land from the time of first ownership ofland in early 1930''s to today? Land in Minnesota
Submitted: 6 years ago.
Category: Tax
Expert:  Ed Johnson replied 6 years ago.

Dear Roseh,

can you tell me more about this?

The family farm is in an irrevocable trust, I get that.

But what I do not know is:

Are the owners of the property, i.e. parents, etc still living?

Have you inherited the property/trust? and now you are selling it?

What are the circumstances?

Customer: replied 6 years ago.
Reply to Ed Johnson's Post: Parents are deceased. Yes to inheritance of the property. Property in the process of sale. Some information has stated that capitol gains will need to be paid on value increase from purchase of farm. Others say gain to be paid on increase of value since last parent's death which was in 2008. Several children involved in the inheritance. Trust was set up properly but there are differing opinions on capitol gains questions from various accountants and attorneys.
Expert:  Ed Johnson replied 6 years ago.

DearCustomer

The reason you have having an issue of differeing opinions is because:

1. If you inherit property from the deceased, you get a stepped up basis of the FMV or appraised value as of the date of the decedent's death.

2. If the trust sells the property, the trust has to pay capital gains based on the original cost basis, (or the estate would). this is because there has been no transfer of the property to a new beneficial owner. when the propety was transfered (gifted) to the irrevocable trust, the owner gave up all control, and the trust is treated as seperate taxable entity.

Thus, in an irrevocable trust, the turst pays the taxo no capital gains and there is no stepped up basis for the property.

When the trust liquidates and the residuary beneficiaries recieve the assets, there is no tax paid on the distribution, other then on actual income of the trust in its final year. The beneficiaries take the trust's basis in any assets distributed.

If the trust gifts the property to you and your siblings, then you still have no stepped up basis.

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and 6 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
I'm still confused. My parents transferred the property to the trustee's upon signing the agreement on the date the trust was made.
So, we inherited the property that was in a trust in our names many years ago.
Also, there is a typo in the 5th line of your answer that makes that a bit unclear.
Can you clarify a bit before I accept your answer?
Thank you.
Expert:  Ed Johnson replied 6 years ago.

Dear Rosenh,

Thank you for asking for clarification and followup. You are able to continue asking for followup until the question closes or you are satisfied with the answer.

When your parent's transferred the property to the trustee, of an irrevocable trust, They gave up all claims to the property; the property was there for no longer in your parent's estate. This is because the irrevocable trust is a seperate taxable entity which (who ) then owned the property.

Either befor or after your parent's death, the trust transfered the property to you. So it was a gift. As a gift you do not get a stepped up basis.

When the property went from the parents to the irrevocable trust, it was also a gift to the trust. AND, that means the trust does not get a stepped up basis. The basis is the adjusted cost basis of the original owner (your parents) as of the date of the transfer into the irrevocable trust.

When the trust tarnsfered it to you, then that is also a gift, in which case also you do not get a stepped up basis. Your basis would be the adjusted cost basis of the property as of the date of transfer.

YOu paid no tax on the inheritance or gift, of the property, but when you sell it you have to pay the capital gains, based on the adjusted cost basis.

The cost basis for the trust then was: orignal cost of the property from when your parents bought it + improvements and additions, + cost of major repairs, + any closing costs that were not previously taken as a deduction.

Your cost basis was then: The trust cost basis + any major repairs + any improvements or additions.

Essentially, you are in fact, then, because there is no stepped up basis, having to figure capital gains from the original purchase of the property.

Many people, when they do estate management, are trying to save the bulk of the estate going to taxes. Overall you do have tax savings, because the estate taxes would be greater than the capital gains taxes. Unfortunately, many people do not realize this aspect of using an irrevocable trust. A simple revocble trust would be a different scenario.

You did not really inherit the property from your parents. What happend was, the trust transferred the property to you as a result of your parents death (or befor their death) by the rules of the trust. The trust gifted you the property.

Clarification on my type: Should have read: "the trust pays the tax on capital gains" (but that was for the event that the trust sold the property and then dispensed the money to you). When I typed that line, it was still unclear tome exactly how the property and property sales was being transfered to you and your siblings.

If the trust had sold the property and then disbursed the proceeds of sale to the siblings, the trust would pay the taxes. (or if the trust documentation provided, the tax debt could be passed on as well).

 

Customer: replied 6 years ago.
Thank you for the explanation.
Expert:  Ed Johnson replied 6 years ago.

Dear Roseh,

Thank you for your feedback and comments. I appreciate the bonus. Best of luck to you.

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