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Lev
Lev, Tax Advisor
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Experience:  Taxes, Immigration, Labor Relations
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My parents own some raw land that they purchased for investment

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My parents own some raw land that they purchased for investment and placed it in a family trust to which my father is the trustee and my mother, brother, and I are the beneficiaries. When thinking in terms of ease of transfer and least tax liability, is it better to have this land in a family trust, to just transfer the deed before death, or to will the property after death. I recently heard a comment about Capital gains tax. It stated that land where the deed is transfered prior to death, the value is set at the parents original purchase price and the profit for which the property was sold above the original purchase price is subject to capital gains. The value of property that is willed is set at current market value at the time of transfer and only the profit for which the property is sold above current market value is subject to capital gains.

To summarize:

1)First of all is this true?

2)Is it best to keep the property in the trust, how is it transfered at the death of the trustee, and what benefits does keeping it in the trust provide provide?

3)If a trust is not the best way then what is the simplest way with least tax liability to transfer property?

4)How are the three different ways to transfer (Family trust, transfer deed, & will) effected by estate tax.

5)What are the individual tax rates of both capital gains & estate tax?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
1) First of all is this true?
Yes - that is true. When the capital asset is sold - that transaction is reported on the tax return - and there will be either capital gain or loss = (selling price) - (adjusted basis)
The basis (or cost basis) is generally your purchase price, however it might be different depending how the property was acquired.
For instance - for inherited property - the basis is a fair market value at the time the decedent passed away (so-called stepped up basis). For gifted property (if the title is transferred which the original owner is alive) - the basis is the lesser of donor's basis and a fair market value at the time of gifting.
2) Is it best to keep the property in the trust, how is it transferred at the death of the trustee, and what benefits does keeping it in the trust provide?
The main purpose of having the trust is to avoid probate when the person dies. If you want to avoid probate and associated costs - it would be better to keep the property in the trust.
I assume that is revocable trust - which is generally ignored for tax purposes - and the property is treated as owned by the settlor - when the settlor dies - the trust becomes irrevocable and the property receives stepped up basis regardless if it is titled to the person or to the trust.
3) If a trust is not the best way then what is the simplest way with least tax liability to transfer property?
There is no income tax if the property is transferred - income taxes are only due when the property is sold for more than its cost basis.
To get stepped up basis - the property should be inherited - means transferred because of death of the owner. It would not matter if the property was owned by the owner or by the revocable trust.
The situation would be different if the property is transferred while the owner is alive - either to you or to the irrevocable trust - in this case – there will not be stepped up basis.
4) How are the three different ways to transfer (Family trust, transfer deed, & will) effected by estate tax?
Above - we talked about INCOME taxes - not ESTATE taxes.
Estate taxes - is a different subject. Currently - there is no estate taxes if the total value of the estate is less than $5,000,000.
For estate tax purposes - all that the decedent owns at the time of death included into his/her estate.
5) What are the individual tax rates of both capital gains & estate tax?
Income tax rate schedule may be found on last page in this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf|
Long term capital gain is taxed at reduced rate - currently - not more than 15% - but is expected 20% starting next year.
Estate taxes are applied on taxable estate - when the total value is above $5,000,000.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22617
Experience: Taxes, Immigration, Labor Relations
Lev and 4 other Tax Specialists are ready to help you
Expert:  Lev replied 1 year ago.
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Expert:  Lev replied 1 year ago.

Let me know if you could not see the answer above.

 

Hi and welcome to Just Answer!
1) First of all is this true?
Yes - that is true. When the capital asset is sold - that transaction is reported on the tax return - and there will be either capital gain or loss = (selling price) - (adjusted basis)
The basis (or cost basis) is generally your purchase price, however it might be different depending how the property was acquired.
For instance - for inherited property - the basis is a fair market value at the time the decedent passed away (so-called stepped up basis). For gifted property (if the title is transferred which the original owner is alive) - the basis is the lesser of donor's basis and a fair market value at the time of gifting.
2) Is it best to keep the property in the trust, how is it transferred at the death of the trustee, and what benefits does keeping it in the trust provide?
The main purpose of having the trust is to avoid probate when the person dies. If you want to avoid probate and associated costs - it would be better to keep the property in the trust.
I assume that is revocable trust - which is generally ignored for tax purposes - and the property is treated as owned by the settlor - when the settlor dies - the trust becomes irrevocable and the property receives stepped up basis regardless if it is titled to the person or to the trust.
3) If a trust is not the best way then what is the simplest way with least tax liability to transfer property?
There is no income tax if the property is transferred - income taxes are only due when the property is sold for more than its cost basis.
To get stepped up basis - the property should be inherited - means transferred because of death of the owner. It would not matter if the property was owned by the owner or by the revocable trust.
The situation would be different if the property is transferred while the owner is alive - either to you or to the irrevocable trust - in this case - there will not be stepped up basis.
4) How are the three different ways to transfer (Family trust, transfer deed, & will) effected by estate tax?
Above - we talked about INCOME taxes - not ESTATE taxes.
Estate taxes - is a different subject. Currently - there is no estate taxes if the total value of the estate is less than $5,000,000.
For estate tax purposes - all that the decedent owns at the time of death included into his/her estate.
5) What are the individual tax rates of both capital gains & estate tax?
Income tax rate schedule may be found on last page in this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf|
Long term capital gain is taxed at reduced rate - currently - not more than 15% - but is expected 20% starting next year.
Estate taxes are applied on taxable estate - when the total value is above $5,000,000.

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