Have a Tax Question? Ask a Tax Expert
Hi and welcome to Just Answer!
Who is a legal owner of the house? Your mother?
The house is owned by a living trust created by my mother and father. My father passed away several years ago.
Is that AB trust?
If that is AB trust - there are two parts - treated as two separate trusts.
I'm not sure. Looking at the trust document it reads "Trustor wishes to establish a revocable family trust which will recieve real and personal property and the proceedsof certain life insurance policies on the Tustors' life."
See more information and explanation in this article - http://www.nolo.com/legal-encyclopedia/tax-saving-ab-trusts-29621.html
You wrote - the house is owned by a living trust created by my mother and father - I assume that was AB trust.When your father passed away - his part of the living trust became irrevocable.However because Texas is a community property state - the whole house got a stepped up basis equal to its fair market value at the time your father died.If you sell the house now - the capital gain will be - (selling price) - (that stepped up basis).
Thus your first step - to determine if you would have any capital gain at all to worry about it?The part of the trust related to your mother is still revocable - and that part of the house is treated as owned by your mother. So because that is her primary residence - up to $250,000 is excluded.The part of the trust related to your father is a separate legal entity - and may have to report the capital gain - if any.
Even you think that your mother will never return to her home - still you may consider her stay in the nursing home as temporary for medical reason - and treat the house as her primary residence - there should not be any issues.
After your mother dies - you will have stepped up basis equal to the fair market value of the house - but only of the part that she owns - not on the part owned by the trust related to your father.So far - unless you want to use the property by your family members - I do not see any benefits from postponing the sale to after her death.
Looking more closely at the trust document I see that there is section that states that upon the death of one Trustor (father) the trustee shall divide the trust property into two separate trusts to be known as Marital and Family Trust.. There are some paragraphs about determining the value of the Marital trust to be in accordance with the federal estate tax. Then there is a statement that the trustee shall have complete authority to make allocations of the trust property between the Marital and Family trusts. Does that in any way affect the situation?
Yes - that seems as AB Trust as I mentioned above.
I have re-read your answer and see that you have addressed this last question. Since the value of the house is around $250,000 and because of the housing market in recent years, the value is virtually the same as when Dad died. Is the capital gain exclusion of up to $250,000 for a primary residence the same for selling a house before death and after?
That is correct - I do not see any benefits from tax prospective to delay the sale.
Thank you for your help.
You are welcome.
Most likely - because you have a stepped up basis - the capital gain will be zero - and you do not need any exclusion.