Question:
Our father bought property for his mother to live in without paying rent. The property was held in a revocable and did not generate any income. He passed in 1999 and other relatives continued to live in the property until 2023.Our brother is the trustee and he as well as two siblings are beneficiaries. The property will be sold and have a capital gain.
My question is who pays capital gain tax and how is it reported?
Response:
I haven’t seen the trust, but it’s likely that it was a standard trust that was for your father’s benefit during his life and then for the benefit of his three children, even if this was not the way the property was handled.
The trust may have provided that it continue after your father’s death or it may have directed that the property be distributed at that time. But that distinction doesn’t really affect the outcome.
The capital gain will be the difference between the proceeds of the sale and the value of the property upon your father’s death in 1999 at which time the basis in the property was adjusted to its fair market value.
The 1999 value could be established through a formal appraisal, but the IRS is likely to accept a real estate tax assessment as well. If the family made any improvements to the property since your father’s death, those costs may be added to the basis to reduce the capital gain.
The property will not be eligible for the $250,000 capital gains exclusion available to homeowners because the relatives who lived in the house were not owners.
Harry S. Margolis
Depending on what the closing attorney requires, you may need to obtain a tax identification number for the trust. If so, it would have to file a 1041 fiduciary income tax return reporting the sale.
It could pay the tax on capital gains at this level, but it would probably be easier to simply distribute all the proceeds to the three siblings and for them to each pay their pro rata share individually. In that case, the trust would issue them each a K-1 reporting their share of the gain, which they would then report on their individual returns.
If the trust said that it ended upon your father’s death and the proceeds were to have been distributed then, back in 1999, then the closing attorney may not require that the trust obtain a tax identification number.
In that case, they may simply require that each of the siblings provides their Social Security number. Each would then report their share of the capital gain on their return without the necessity of the trust filing a 1041 return as well.
Either way, the capital gains will pass through to the three ultimate beneficiaries with the tax paid by each individually.
Harry S. Margolis
