Q: As a heir, do I have to pay capital gains on money I recvd from property sold from a Testamentary Trust in California?
My mom has 6 rental homes. She just died. It appears to be a 50/50 split, with her trust and my father's who died in 1971. Trusts list me and my 3 brothers as beneficiaries. The properties are to be sold. I have heard the capital gains tax will be 33% or more.
A: Capital Gains are the difference between the basis of property and the sale price of property (less selling costs).
Basis of property during life is the original purchase price of property (with adjustments).
Post-mortem basis is adjusted to the Date of Death Fair Market Value, usually through appraisal.
In many cases the post-mortem basis is roughly equal to the post-mortem sale price, which reduces or eliminates capital gains.
Jonathan Purcell is a California Attorney.
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A: You had best take this question to a CPA, but it sounds to me like half of those properties were included in your dad's taxable estate and half was included in your mom's taxable estate. Therefore, half of each property would have a basis equal to the values on your dad's date of death, and half of each property would have a basis equal to the values on your mom's date of death. This was common with trust-based estate plans created back in the day when the estate tax exemption was really low, as it was in 1971.
A: If the trust sells the asset prior to distribution to beneficiaries, the trust reports the capital gain or loss and pays the tax, unless the sale occurs in the final year of the trust, in which case, the capital gain or loss is reported to each of the individual beneficiaries on a separate IRS Form K-1 and the beneficiary pays the capital gain tax on his or her own IRS Form 1040 US Individual Income Tax Return at his or her own marginal income tax rates. The same would be true of any State income taxes attributable to the sale of the property.
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