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Lane
Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3718
Experience:  Providing Financial & Tax advice since 1986
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What would the tax ramifications be if my husband and I (both

Resolved Question:

What would the tax ramifications be if my husband and I (both 54) paid off our mortgage ($183k) with funds from a generation skipping trust in my name? The trust (I am the beneficiary) would then own the house. I have health issues and we are in need of freeing up some of our income and my financial advisor feels this would be a good move. I understand that we would no longer have the mortgage interest deduction. Would this change of ownership be reflected at income? Household income is approx. $100,000.
Submitted: 9 months ago.
Category: Tax
Expert:  Lane replied 9 months ago.

Lane :

Hi,

Lane :

First, as long as you have been living in the house for any 24 months of the past five years, you can exclude $500,000 of any capital gains that you might have from the sale to the trust...

Lane :

And, as you have mentioned, the cash flow gain from not HAVING the mortgage obligation, will need to be adjusted for the tax benefit you have been receiving from the mortgage interest and property tax deduction

Lane :

And of course, you need to have trust (no pun intended) in the trust's trustee that (1) you'll be secure in living there, (2) the trust's terms allow for this and won't disqualify it from reaching it's intended objectives - probably freezing of the asset value for the grantor and potential removal from their gross estate - and (3) that the trust has the ability (and the trustee has the willingness) to make this happen

Lane :

But from an INCOME tax stand point for you, you are simply selling the house to a separate taxable entity, and again, as long as it's your personal residence you can exclude up to $500,000 of gain (for married filing jointly) from capital gains taxation

Lane :

I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here)

Lane :

Please let me know if you have any questions at all ...

Lane :

Let me know …


Lane


Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3718
Experience: Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Expert:  Lane replied 9 months ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 9 months ago.

 

Hi,

… just checking back in here, as I never saw you come into the chat.

Please let me know if you need anything else at all on this.

Lane

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.

HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Customer: replied 9 months ago.

Thank you so much, Lane. I was not aware of the $500,000 cap on capital gains... that is a huge relief.


The trustee and financial advisor is one in the same, he is the one who suggested paying off the mortgage. He said we can set it up to pay interest to the trust if need be. I believe we could then take the interest and, essentially, be paying myself back. So that amount of my trust would be in real estate instead of investment. We had planned to sell the home in another year or two.

Expert:  Lane replied 9 months ago.

That's right.

It's a good thought.

Based on what you've provided, can't see any reason not to do it.

And again, there's really NO real income tax effect all, other than the loss of the mortgage interest and real estate deduction.

From a purely financial perspective, the net benefit outweighs the tax costs (loss of write-offs)

Lane
Customer: replied 9 months ago.

Thanks again, Lane. You have really helped me with this.

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