Question from California. Numbers are approximate, but here's the
situation. Mom passed away in 2000. Her assets (a rental home and a
some first/second trust deeds, all of which were producing income)
were in her living trust. I am successor trustee. Sis and I are the
sole heirs. I have been managing the trust, collecting income, filing
pass-thru tax returns, and disbursing money equally/regularly to Sis
and myself (we declare the income on our personal tax returns via
K-1's from the trust).

Now it's time to dissolve Mom's living trust. All the notes
have run their course. Only asset left is the rental home. The trust
owns it outright (no mortgage). Stepped up value on date of death was
200K. It will sell for 350K. So I figure the first 200K is non-taxable
inheritance, but there will be capital gains tax due on the 150K
profit. I think (?) if I transfer house to Sis and I first, THEN we
sell it as individuals, we'll pay capital gains tax (on the 150K) at
the current 15% rate, right? Is it a different rate (lower would be
nice) if we leave it in the trust and the trust sells it? Not looking
for creative ways to avoid tax such as a Starker 1031 (Sis and I get
along great, but would rather not be in business together on another
investment). Just wondering how to legally pay the capital gains tax
on the home's appreciation at the lowest possible rate. Thoughts?

P.S. Still a huge GA fan, but please bring back the "academic owl"
icon/link to the "More" page. I really miss it and I know I'm not
alone. Is there a petition I could sign?

You both have GOT to get a tax attorney. Go to lawyers.com and find
one in your state. There are a lot of variables to take into
consideration. The cascaded transfer you mention may wind up costing
you more than necessary if only for the transfer fees.

In the final year of a trust, all income including capital gains is
transferred to the beneficiaries via the K-1. You just tick the little
"Final return" boxes on the 1041 & Schedules K-1. Each beneficiary
pays taxes at his/her tax rates (5%, 15%, 25% depending on icome). The
only problem would be if the trust sold the house and continued to
exist the following tax year.

Adding an interim title transfer could screw up title for the sale &
will require both you & Sis to sign the deed, instead of just the
trustee (you). It will also add costs.

Note that your tax rate will include taxes on 'unrecaptured section
1250 gains.' This is the depreciation you claimed or could have
claimed each year died. If you have not been claiming depreciation,
see a tax pro before selling & ask about catch-up depreciation. Your
total gain will be $150k cap gains - costs of sale PLUS any
depreciation allowed or allowable since Mom's death. The capital gains
are taxed at 5 or 15%; the depreciation recapture is ordinary income
taxed at a max rate of 25%. You've probably claimed over $20k in
depreciation, so the recapture tax is a significant amount.



T Meek
Enrolled Agent