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Capital Gains rate for Trusts
Old 10-21-2019, 09:34 AM   #1
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Capital Gains rate for Trusts

My father passed away last year and all of his assets were in a Trust. Upon his death, the family trust was distributed into the heirs' trusts. Dad owned a property that was appraised at approx 30% of our asking price, so there will be substantial capital gains when it sells. I'm trying to determine what the CG tax rate is for Trusts. I think my accountant said it's 35%, but searching online shows conflicting info, with rates from 20-37.5%.

Do any of you know where I can confirm the rate? (link please)

Does anyone have ideas on ways to lower the rate if it is 35%+? I could transfer the deed from the Trust into my personal name, but would lose the limited liability protection. Maybe an LLC, etc.?

I'm looking into Opportunity Zones and OZ funds. That seems like the simplest solution, but I'm still researching the details about investing in them.
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Old 10-21-2019, 10:16 AM   #2
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Pretty sure you get a step up in basis on the property at death. So if property was $30k at purchase and $100k at death the $100k is your basis.

I just reread and not sure now. Are you saying the property was appraised at death and you are selling now for 70% more? That is very high appreciation. When was the appraisal done?

I'd ask a CPA or estate lawyer
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Old 10-21-2019, 10:17 AM   #3
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You need an expert who, possibly, is not your current CPA. The first question on the property is: What was its value on the date of your father's death? That is your "basis" when selling and you will pay taxes only on the difference between your basis and your net sale proceeds. This is called "basis step up on death." No appraisers or appraisals needed.

Re playing games to dodge the taxes there are few that are legal. If it's income property you may be able to do a "1031" exchange. Again, you need an expert. FWIW, your best ideas are things the IRS would probably call "tax evasion."

Re Opportunity Zones, etc. do not let the tax tail wag the investment dog. Evaluate any deal as an investment first, and only afterwards consider the tax impact. People selling this kind of thing know very well that a good sales technique is to get the mark enthralled with the tax aspects. In the magician business this is called "misdirection."
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Old 10-21-2019, 11:54 AM   #4
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The property isn't income producing, so a 1031 doesn't apply. It is an extra large waterfront property that my grandparents purchased in the 1960's. There are no true comps since no other property has recently been available this size. The last appraisal was in line with the property tax value, based on neighboring tax values to appraisal values rates. This property is large enough to be subdivided into 4 adjacent lots, so we chose to price it as 4+ thinking it's worth more intact to the "right buyer".

If the Trust CG rate is 35% I'd like to consider our best options.
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Old 10-21-2019, 12:04 PM   #5
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You get to say what the basis is but of course you have to have backup. I would pick a basis that is consistent with your actual selling price minus a year of property appreciation in the area. But, ... again, ... again, expert help is needed with this stuff.

Worst case you might get audited and the IRS will argue about what the basis should be, lower of course. I used to have a CPA who said: "If you don't get audited once in a while, you're not trying hard enough."
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Old 10-21-2019, 12:41 PM   #6
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My mother passed last year in California, and this was our familyís experience regarding her property and taxes: We paid for an appraisal of the home upon the date of death in order to receive a stepped up basis. Perhaps the appraisal wasnít absolutely necessary, but the documentation could be useful if the IRS questions the tax returns in the future.

Regarding difficulty obtaining comps due to the uniqueness of your fatherís property: we also had this issue in the settlement of the family estate, complicated by the fact it was set up as an A-B trust just prior to my father passing in 2002. An acre of undeveloped property in Hawaii was owned at that time and subsequently sold 5 years later after his death. We were told by the estate attorney that we needed a valuation of the Hawaii property upon the date of my fatherís death in 2002. It was difficult to get a historical appraisal due to the length of time that had passed and the uniqueness of the property which had no comps. We were eventually able to locate a realtor in Hawaii who was able to provide a historical appraisal which was then turned over to a CPA who is preparing the trust tax forms.

So I wouldnít worry about massive capital gains, because you do receive a stepped-up cost basis. Just have some documentation available in case the IRS inquires.
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Old 10-21-2019, 03:11 PM   #7
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California. Upon Death. Yes, there is a step up of basis of property. Be careful.
Example. If you have A B Trust. Husband and Wife. Husband passes.
House is put in A Trust. Receives step up in basis. (irrevocable trust).
Remaining assets put into B Trust.

When Wife passes. Assets in B Trust will receive step up in basis.
House in A Trust will NOT receive a 2nd step up in basis.
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Old 10-21-2019, 03:22 PM   #8
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Originally Posted by GreenEggs View Post
My father passed away last year and all of his assets were in a Trust. Upon his death, the family trust was distributed into the heirs' trusts. Dad owned a property that was appraised at approx 30% of our asking price, so there will be substantial capital gains when it sells. I'm trying to determine what the CG tax rate is for Trusts. I think my accountant said it's 35%, but searching online shows conflicting info, with rates from 20-37.5%.

Do any of you know where I can confirm the rate? (link please)

Does anyone have ideas on ways to lower the rate if it is 35%+? I could transfer the deed from the Trust into my personal name, but would lose the limited liability protection. Maybe an LLC, etc.?

I'm looking into Opportunity Zones and OZ funds. That seems like the simplest solution, but I'm still researching the details about investing in them.
I think the rates for capital gains on trusts is contained in the instructions for Schedule D for Form 1041. Here is the link to the 2018 form:

https://www.irs.gov/pub/irs-pdf/i1041sd.pdf

Look at the Schedule D worksheet on the last page. (You might end up filling out Part V of Schedule D instead, but I think the tax computations are similar if not identical.) I believe the rate on the sale of the home will depend on the trust's other income. It could be anywhere from 0% to 28%.

From my little experience, trusts are terrible for income taxes. What you might consider, if the trusts allow it, is to distribute the house out of the trust(s) to the individual trust beneficiaries before selling it. Then sell it as the individual owners. Whether this is smart will probably depend on the tax rates of the trust beneficiaries.
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Old 10-21-2019, 03:24 PM   #9
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Assuming there is not an estate tax issue go hire other appraisers for other appraisals. You can choose which one to use as your basis. Heck, you could get 10 appraisals done. Explain you are looking for a high number and they'll usually find a way to get it done. If you have an estate tax problem then that won't work of course. Most people do not have estate tax problems anymore.

I would talk to a 1031 exchange expert on if you can do a 1031. Don't read stuff online but hire an actual 1031 attorney. Pay someone money for advice. I don't know the 1031 rules with such specificity so I won't wager more than a guess.

Also, in my experience selling land can be very tough. First you have to find a buyer who has cash or has really good credit which is hard with land. Second, buyers will re-trade up until the last second so don't spend your money until it's actually in the bank.

Oh ya, I thought the trust files a 1041 and sends K1's to the benes so it goes on your personal returns at personal rates. Hire a good CPA. This is not a case for the Block or similar... and certainly not for a DIYer.

Good luck.
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Old 10-21-2019, 07:38 PM   #10
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....

Oh ya, I thought the trust files a 1041 and sends K1's to the benes so it goes on your personal returns at personal rates. Hire a good CPA. This is not a case for the Block or similar... and certainly not for a DIYer.

Good luck.
This is my understanding (and limited experience) as well. I don't have time to look up links right now, but it's really not that complicated. Any good tax person should know how to handle an estate/trust tax and fill out the K-1s (make the entries the computer asks for, that is). It's not rocket science, but it takes a little effort to get your head around it all the first time through.

The higher trust tax rates only apply to funds that re held in the trust and not distributed.

-ERD50
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