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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My wife is inherating a home that was owned by her mother and

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My wife is inherating a home that was owned by her mother and is now in trust. The property was a vacation home her mother bought in 1970. The property is being distributed to three daughters from the trust. The home is in Hawaii and the purchase price was 70k and the present value is $3,000.000. How can we determine capital gains and where does the 250k or 500k exemption fall if applicable. The improvements are probably around $200,oo so the cost basis would be $270,000 with improvements. The property has been rented out for the last ten years which I assume would make it an investment property as well as a vacation home which we use.
Submitted: 6 years ago.
Category: Tax
Expert:  Merlo replied 6 years ago.

Was this home part of a revocable or irrevocable trust?

 

 

Customer: replied 6 years ago.
It is part of a irrevocable/gat rust
Expert:  Merlo replied 6 years ago.

Hello againCustomer

 

If the home was part of an irrevocable trust, then the beneficiaries of that trust retain the same basis in the property as the original donor of the property. So if the mother's cost basis (purchase price plus improvements) was $270,000, that same basis now passes to the trust beneficiaries.

 

If you were to now sell the home for $3 million, you would have a gain of $2,730,000. This would be taxable as a long term capital gain and that tax rate is currently 15%. You would also owe taxes to the state of Hawaii on that same gain at the rate of 8.25%.

 

The $250,000/$500,000 exemption that you inquired about only applies to the sale of a taxpayer's primary home. So that exemption would not apply to the sale of this property.

 

You cannot avoid the tax on the gain from this sale, but you can defer the tax on the sale of this property if you use the sales proceeds to invest in another investment property. In order to do this you would have to organize the sale as part of a 1031 Exchange. A third party qualified intermediary would handle the sales proceeds and the new investment purchase. The new investment property being purchased must be identified within 45 days after the sale of the first property, and the actual purchase of the replacement property must be completed within 180 days of the first sale. At the time the replacement property is sold, taxes would be due at that time, unless yet another 1031 Exchange were utilized.

 

If this was helpful please press the Accept button. Positive feedback is also appreciated.

 

Thank youCustomer/p>

 

 

Merlo and 2 other Tax Specialists are ready to help you
Customer: replied 6 years ago.

Great work..I am sure I'll be back for advice as we prepare to sell the property.

 

Thanks Steven

Expert:  Merlo replied 6 years ago.

Thank you Steven

 

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