Capital gains tax question

[FranklinHawk]

So, we recently became the owners of my mother-in-law's home after her passing. 12-13 years ago, we had paid off her mortgage (knew she couldn't afford it on her fixed income) and the house was put into an estate trust with us being the beneficiary. The transaction to put it into the trust including the amount we paid to close the mortgage is obviously recorded on Beacon.

I think I know the answer, but my question is whether our cost basis is current value or it's the amount paid to pay off the mortgage and we'll be on the hook for capital gains tax on the difference (like everywhere else, value has gone up significantly in that timeframe) if/when we sell it?

 

[hawkjt]

I would assume your basis will be stepped up to current market value at time you take possession which means no capital gain if you sell now.

 

[luvmyhawks]

Well, your cost basis certainly isn’t current value as this transaction took place 12-13 years ago, correct? What kind of trust? Was the property gifted to you before her passing? Have you been renting it out?

 

[FranklinHawk]

Well, your cost basis certainly isn’t current value as this transaction took place 12-13 years ago, correct? What kind of trust? Was the property gifted to you before her passing? Have you been renting it out?

Not gifted. When I look on the Beacon transaction, it shows as <MIL Name> LF Estate then to <our names>, transaction type is Deed, and the amount we paid for her mortgage showing.

I suspected that amount is our cost basis, but haven't been able to find anything that says for sure.

 

[cheeselog8]

Was the home owned by her life estate when she died? Or had it already transferred to you prior to her death?

 

[FranklinHawk]

Was the home owned by her life estate when she died? Or had it already transferred to you prior to her death?

I'm not an expert on this stuff, but since the transaction said MIL Life Estate then to us, I assume the life estate owned it. After she passed, it was then recorded as the Life Estate to us as an affidavit at $0.

 

[tumorboy]

I'm not an expert on this stuff, but since the transaction said MIL Life Estate then to us, I assume the life estate owned it. After she passed, it was then recorded as the Life Estate to us as an affidavit at $0.

Should be FMV on day she died. As long as you did all of the legal paperwork properly. I’d check with your accountant though.

 

[cheeselog8]

I'm not an expert on this stuff, but since the transaction said MIL Life Estate then to us, I assume the life estate owned it. After she passed, it was then recorded as the Life Estate to us as an affidavit at $0.

If the house was in her life estate when she died, you would get a step-up in basis to FMV on her date of death. If the house was sold shortly thereafter, the selling price is a good indicator of FMV.

So then sale price = cost basis which results in no taxable gain.

But I suggest contacting a local CPA, it would be worth the money.

 

[FranklinHawk]

An attorney did the paperwork, so I'd assume so.

 

[HawkMachine]

When did MIL pass away??

 

[tumorboy]

An attorney did the paperwork, so I'd assume so.

Then it should be FMV of day she died as your tax cost basis. This thing was set up so children didn’t get stuck with a massive tax bill to sell an asset.

 

[FranklinHawk]

When did MIL pass away??

Early December, the affidavit moving the house from the life estate to us was late December.

 

[cfbfan23]

When my dad passed away, I was the beneficiary of a Trust. I'm pretty sure I inherited the assets at the cost-basis, not the FMV at his death. I guess I'll find out if/when I sell some. No probate, though.

 

[Rifler]

When OP and his wife paid off the mortgage did they identify that expense as a gift to the mother in law?

 

[luvmyhawks]

I'm not an expert on this stuff, but since the transaction said MIL Life Estate then to us, I assume the life estate owned it. After she passed, it was then recorded as the Life Estate to us as an affidavit at $0.

Ah, if this is the case you should be good to go. Cost basis would be stepped up to the day she died. You have to be careful with trusts as it isn’t always so cut and dry on step up or not depending on how the trust was set up and the asset was/is treated. As some others have said, check with your accountant and or the attorney to be sure, but if what you say is true, you should be good.

 

[luvmyhawks]

When my dad passed away, I was the beneficiary of a Trust. I'm pretty sure I inherited the assets at the cost-basis, not the FMV at his death. I guess I'll find out if/when I sell some. No probate, though.

If it was set up as an irrevocable trust and gifted to the trust, you will likely inherit his cost basis, not fmv on his passing. Cost you capital gains but depending on the size of the estate, may have saved you on estate taxes.

 

[goldmom]

When OP and his wife paid off the mortgage did they identify that expense as a gift to the mother in law?

Interesting question and it, along with some other points raised by others, merits clarification by a CPA firm experienced in such matters.

 

[FranklinHawk]

When OP and his wife paid off the mortgage did they identify that expense as a gift to the mother in law?

I don't think that the amount was identified at all on our tax return, the attorney didn't mention anything about that.

 

[HawkMachine]

I don't think that the amount was identified at all on our tax return, the attorney didn't mention anything about that.

It wouldn't have been on your tax return.

You may have filed a separate gift tax return depending on how much the payoff was.

 

[Rifler]

I don't think that the amount was identified at all on our tax return, the attorney didn't mention anything about that.

Perhaps it didn't exceed the exemption amount for the year that it was rendered?

 

[FranklinHawk]

Perhaps it didn't exceed the exemption amount for the year that it was rendered?

Assuming that technically we could each gift her equal amounts and be under the threshold, that would be true. It wasn't a large transaction.

 

[cfbfan23]

If it was set up as an irrevocable trust and gifted to the trust, you will likely inherit his cost basis, not fmv on his passing. Cost you capital gains but depending on the size of the estate, may have saved you on estate taxes.

Unfortunately for me, the Trust was in no danger of exceeding the estate exemption.

 

[luvmyhawks]

Unfortunately for me, the Trust was in no danger of exceeding the estate exemption.

Who let the poor in??

 

[cfbfan23]

Who let the poor in??

I didn't say it was chump change, either.

 

[Hawk_4shur]

When my dad passed away, I was the beneficiary of a Trust. I'm pretty sure I inherited the assets at the cost-basis, not the FMV at his death. I guess I'll find out if/when I sell some. No probate, though.

If it was set up as an irrevocable trust and gifted to the trust, you will likely inherit his cost basis, not fmv on his passing. Cost you capital gains but depending on the size of the estate, may have saved you on estate taxes.

I think that is correct luvmyhawks. If revocable trust you would get the step up.

Obviously I don't know any of the circumstances, but using an irrevocable trust would be a bit odd. 🤷‍♂️

 

[FranklinHawk]

If the house was in her life estate when she died, you would get a step-up in basis to FMV on her date of death. If the house was sold shortly thereafter, the selling price is a good indicator of FMV.

So then sale price = cost basis which results in no taxable gain.

But I suggest contacting a local CPA, it would be worth the money.

I have a guy on my team whose wife is a CPA specializing in taxes, she confirmed this is correct. Thanks to all who responded.

 

[markfromj]

I would assume your basis will be stepped up to current market value at time you take possession which means no capital gain if you sell now.

This.