Q: Is sibling buyout payment taxable?
We are 3 siblings/beneficiaries of our mother's trust. Our sister wants to buyout the 2 of us. Will the buyout payment each of us receive be taxable? Will either of us 2 buyout recipients be responsible for higher property tax payments if they become due prior to the sibling property transfer?
A:
Based on the information provided, here's a general overview of the tax implications for a sibling buyout in California:
1. Taxability of the buyout payment:
The taxability of the buyout payment depends on several factors:
a) If the buyout is for your share of the property at its current fair market value, you may not owe capital gains tax if the property's value hasn't increased significantly since your mother's death. This is due to the "step-up in basis" rule, which adjusts the property's cost basis to its fair market value at the time of inheritance.
b) However, if the property has appreciated since you inherited it, you may owe capital gains tax on the difference between the buyout amount and the stepped-up basis.
c) If the buyout includes payment for other assets in the trust besides real estate, the tax treatment may vary depending on the nature of those assets.
2. Property tax implications:
Regarding property taxes:
a) In California, property tax reassessments are typically triggered by a change in ownership. However, transfers between siblings can qualify for an exclusion from reassessment under Proposition 19 if certain conditions are met.
b) If the property transfer qualifies for the sibling-to-sibling exclusion, there should not be an increase in property taxes due to the buyout.
c) The responsibility for property tax payments generally lies with the property owner. Until the transfer is complete, the trust (or the current owners) would typically be responsible for any property tax payments that come due.
It's important to note that tax laws can be complex, and the specific details of your situation may affect the tax implications. To ensure compliance with current California and federal tax laws and to get advice tailored to your specific situation, I strongly recommend consulting with a California-licensed tax attorney or CPA who specializes in trust and estate matters.
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