Have a Tax Question? Ask a Tax Expert
Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.
Please return to the previous question where my comments were posted.
That's the link to the question with me already in progress. Can you go there please to continue?
Hello, are you here or at the other question?
Multiple similar questions get confusing; if you are having trouble reading my responses, let me know & I'll switch to a different format (Question & Answer format is slower but everything is displayed)
I can't seem to click on that link.
OK, stay here & I'll copy everything over. (you would have to highlight the link first and right click to open it)
In order to respond accurately to your question, I'll need to ask you a few questions (which on the surface may not seem relevant to you at first).
When your mother died, (was it in 1985?), did the trust become irrevocable?
Were you the sole trustee and beneficiary at that time?
Are you by any chance familiar with the court case known as Phelan v. Commissioner?
A summary of the pertinent issues (in plain language) may be found at the following link:
This case addresses several issues that would apply to your situation:
1. Application of the so called "dealer" rules at the entity level &
I seem to be hopeless on this site. Thought I would be getting advice from an enrolled agent or tax attorney which is why I offered the $180. Did I see somewhere (which I now can't locate) that you're a financial planner? While you're probably very good, I'd really prefer a tax specialist. Can you refer this question on? Thanks so much.
2. What constitutes a real estate dealer & what level & nature of the activity constitutes same.
I am a recently retired CPA, who has served as an expert witness in both Federal & Massachusetts courts. The last case I served as the Expert on was a Federal case involving a real estate development corporation; I am throughly familiar with tax law as it relates to real estate transaction and have had several real estate brokers & realators as clients over the years.
Your issues also involve Trust law and those issues need to be determined before you even get to the question of whether or not you can do what you propose with reasonable confidence that you will not be taking undue risk given the significant Federal & State income taxes involved.
If you would rather not continue with me, I'll be happy to "Opt out" and you can go elsewhere or work with someone else, whatever you wish. We have an unconditional money back guarantee, so even after we answer your questions, if you are satisfied with our answers (even if you don't like the "bad news") you may obtain a full refund of any deposit that you have made. So, the risk is all ours.
Are you here now? If so, please stay here.
OK, there's everything from the other question.
Please just confirm you are here now.
I'm here/ thanks.
OK, now we should be OK\
Perhaps you can answer my questions now.
Mom's died Aug. '85 before generation skipping went out. Trust became irrevocable then. Think both I & my husband were Trustees. He died in '09. We left her assets in the trust so they wouldn't be in our estate & could pass directly to our kids (now middle aged) but, except for some distributions to them for house down payments, the balance just stayed in the Trust. Right now all that's in the Trust is this house we bought in '07, and a rented warehouse which nets about $35K/yr. Would really like to sell the house & keep the warehouse. But if I can, I'd also like to offset that loss against my ordinary income (currently about $200K/yr) which would allow me to pull $800K out of the IRA tax fee.
Yes, I fully understand what you are trying to do.
Are your children named in the trust as beneficiaries after you die? What prevents you from terminating the trust and withdrawing all the funds for your benefit? (I'm not suggesting you do that).
Yes, kids are successor beneficiaries. I'd love to terminate the trust. Only thing is that the warehouse ($600K gain if sold, $35K net inc. if kept) would then go into my estate which is teetering at the $5mill exemption now. If I croak in the next year that $600 would be taxed at estate rate. Wonder if I could terminate trust, distribute warehouse to the kids, sell the underwater property to take the tax loss for myself. I won't ever need any money from that Trust.
OK, I understand. I think you'll find that since you are the sole trustee and the sole beneficiary with no restriction as to principal distribution to yourself that the assets of the trust are already in your estate.
What kind of estate planning have you done at this point? Do you have your own CPA that does your returns and gets involved with your attorney in your estate plan?
Boy, I haven't heard that before. Are you sure? Remember that this Trust became irrevocable before the law did away with generation skipping trusts.
The point is that you control everything; you can terminate the trust; in effect the trust has become the same as your own living trust, which of course would be included in your estate.
You have raised several issues here; but skipping over that one for the moment, and assuming that the trust is in fact irrevocable (which you say it isn't when it comes to you); if you read the case I cited above, you will see that the test to determine whether or not capital gains or ordinary income treatment applies to that house, would be applied first at the entity (trust) level. Clearly, the trust isn't a real estate dealer.
Sorry I didn't see the last question. Yes, I have a CPA who does the returns but he's very vague about tax planning. I had an attorney who told me that I could do what I want to do with the underwater property, but when I ran it by 2 CPAs they paled & said they didn't want to take me on. Acted like I was trying to do something illegal which scared me out of doing it. It was the attorney's suggestion! But I don't want to do something that causes the kids trouble when I'm no longer here to explain it. On the other hand, if that attorney was right and this is perfectly legal, I'd sure hate to give up the benefit of taking that loss against an IRA withdrawal. So you can see why I thought this might be a good way to get more opinions.
Right. The trust isn't a real estate dealer. So the Trust wouldn't sell/take the loss. But after it's distributed to me, can I do that?
If the trust were to sell the property (if it were an irrevocable trust) unless the trust were terminated, the resulting capital gain or loss would only be passed through to you if it were the last year of the trust.
Not to mention the fact that if the trust were not deemed to be irrevocable (calling it irrevocable doesn't make it irrevocable) then when your husband died in 2009, that may have generated another whole basis issue when it comes to the home that you purchased in 2007.
Here's the best advice I can give you at the moment and believe me, I wish I had all the documents involved in order than I could really figure out what is going on. No wonder those other CPAs didn't want to get involved. That should tell you something.
OK. Let's say I terminate the Trust next year. Both assets (underwater house & warehouse) come to me. I sell underwater house. Can I take the loss on that house next year & keep the warehouse?
First of all, understand that CPAs can't give you a written opinion as to how the tax law applies to your situation (we can tell you how we would treat in on a tax return); you are, as you know, dealing with a lot of money here; I'd be 99% certain that you can't do what you wish with respect to the IRA. There are other alternatives for that however, extending the payout to your beneficiaries over their lifetimes to minimize the income taxes for one.
Clearly, before you ever embark on that kind of a transaction, given the $ involved, I wouldn't recommend that you do that without a written opinion from a tax attorney. However, there are many ancillary issues involved here, not just with that transaction, and you really need to get an financial and estate tax plan put together so you can rely on both what the current situation is with respect to that trust as well as what options you have to deal with a potential estate tax later on. As a minimum you should be utilizing the annual 14K per person gift tax exclusion to try and keep your estate below the 5,250,000. estate tax threshold.
Thank you Steven.
In response to your last question, you must make certain that the home's basis isn't reduced by your husband's passing if the trust isn't and/or wasn't actually irrevocable with respect to you and your husband. It gets complicated.
I'm going to rate you excellent although you couldn't answer the question, because I think this question is too complicated for this kind of forum. Wonder if you'd consider reducing the payment I offered to $120 for the hour?
I'm sorry but I have no control over the funds; I don't receive what you offer in any case. I would if I could. But one more thing. I can answer your question about the IRA & I did actually, but the point is it involves the situation with respect to the trust first. However, as I said, skipping over that, the answer would be no as the case law requires that the real estate dealer status be determined at the entity level first. We agree that the trust is not a real estate dealer.