Hi Lev (or whoever answers :)This is a follow-up question to one you answered a few months ago. Following is the original question and your answer, and finally the new question is at the end.QUESTION
I am the successor trustee of a California
irrevocable living trust. Both my parents have been deceased for three years. We are now selling the house, which has appreciated approximately $150,000 in the three years since their death. It sold for 1.1 million dollars. The house has been in the name ofthe trust since 2007. Am I free to distribute all the proceeds from the sale to the successors or must the living trust pay capital gains
or some other tax
before I do so?ANSWER
After your parents passed away - that is not a living trust anymore.
The trust became irrevocable after they passed away - and it is a separated legal and taxing entity.
You are correct that for income
tax purposes - the basis of inherited assets
is the fair market value of the house when your parents passed away - so-called stepped up basis.So the taxable capital gain will be the difference between the selling price and the basis.You may distribute all funds to beneficiaries
- that is not an issue.
However - the trust will file an income tax return
- form 1041
. Then - taxable income
will be passed to beneficiaries and reported on K1 - so each beneficiary will include into individual tax return
his/her share of taxable income passed from the trust.So - you might want to inform beneficiaries - so K1 would not be a surprise for them.But funds may be distributed and the trust will NOT have any income tax liability
Do I report the sale of the house on 8949 and use those values on 1041? Are there any other federal forms
needed to complete this?Also, what equivalent State
of California forms do I need to complete for the same scenario?Thanks!Chuck