Cost basis on a house, originally in a living trust?

Asked over 3 years ago - Tucson, AZ

I have a question on the appropriate cost basis on a house. If a house cost basis was $100K and then it was put into a living trust. One spouse passes away, the trust splits into two, marital and family. The appraisal on the house is $500K, which is the new cost basis. When the second spouse passes away and the house value drops to $300K. What is the cost basis for each for the trusts, family and marital? Is it the original $500K or it goes down to $300K or one trust is the old value and the other at the new value? The beneficiaries are the same in both trusts. If the house is sold at $400K would there be a taxable gain or loss in either trust?

Thank you

Attorney answers (4)

  1. Robert Jan Suhajda

    Contributor Level 17
    Best Answer
    chosen by asker

    Answered . I say the family trust, by-pass trust, credit trust are all the same.
    If the property was community property in the living trust, and check the trust language, because it should state the character of the property. There is a different result if the property is held jointly or as TIC. On the first death there is a double step up in basis so each piece is worth $250. Now on the death of the second spouse, the property in the marital trust is valued at DOD value or $150 and maybe subject to a discount for lack of marketability. If the house is sold then there would be a gain and a loss. IRC 121, gain from principal residence exclusion may apply here as noted below but I am not positive.

    (11) Property acquired from a decedent
    The exclusion under this section shall apply to property sold by—
    (A) the estate of a decedent,
    (B) any individual who acquired such property from the decedent (within the meaning of section 1022), and
    (C) a trust which, immediately before the death of the decedent, was a qualified revocable trust (as defined in section 645 (b)(1)) established by the decedent,
    determined by taking into account the ownership and use by the decedent.

    Disclaimer of California Attorney
    Although the above response is believed to be accurate, it should not be relied upon as any type of legal advice because the information provided is incomplete. It is intended to educate the reader and a more definite answer should be based on a consultation with a lawyer. No attorney client relation is formed with me without a written contract.

    Good Luck starts with a strategy and a plan.

    Robert J. Suhajda, MS,CPA
    Attorney-At-Law
    17721 Norwalk Blvd. #43
    Artesia, CA 90701
    562-924-8922

    Former financial auditor and controller. Admitted to US Tax Court, Income Tax, IRS representation, Fiduciary income tax returns, Estate and Gift tax returns,
    Homeowner Association Strategist.

    As a strategist, I analyze and integrate the operations, reserve study, budget, and financial statements into a unitary plan for 1 – 5 years, utilizing my experience as
    a former treasurer and vice president of a homeowners' association and corporate
    controller and auditor, to minimize homeowner association dues.

  2. Thomas Edward Rossmeissl

    Pro

    Contributor Level 14

    Answered . It depends in part on the nature of the trusts holding the property. If the house was split into two trusts on the first death, and one trust (survivor's trust) is included in the survivor's estate but the other trust (bypass or credit shelter trust) is not included in the survivor's estate for estate tax purposes, then there would be no further adjustment to basis in the portion of the house held in the bypass/credit-shelter trust. Only the survivor's portion of the house would receive that adjustment in basis on the survivor's death. Assuming that is the case, then without considering valuation discounts that are available, on the first death, 1/2 was allocated to each trust ($250,000 in value). On the second death, the survivor's half is adjusted down to $150,000 (1/2 of $300k); the basis in the other half remains at $250,000. If the house as a whole appreciates to $400,000 and is thereafter sold, there would be capital gain of $50k on teh survivor's trust and a loss of $50k on the other trust.

    Valuation discounts complicate the discussion, but the gist of it is that the value of each trust's share is decreased because of co-ownership and resulting lack of marketability. Neither trust could have readily sold its 50% share, so the value of that 50% interest would arguably be less than 50% of the value of the entire property as a whole.

    You should consult with an experienced trust and estates and tax advisor in your jurisdiction for assistance.

    Disclaimer: I am not licensed to practice in Arizona. This general response is not intended to create an attorney-client relationship.

  3. Robert Jan Suhajda

    Contributor Level 17

    Answered . I forgot to add the following - An added complication is for deaths that occurred in 2010 only, estates have the option of using the stepped-up basis (when the property is sold, a gain will be calculated based on the change in value from the date of death) or the carryover basis (when the property is sold, a gain will be calculated based on the change in value from the date of purchase by the decedent). But only if correct forms are filed on the correct dates. See IRS pub 4895. So you definitely need a lawyer.

    Disclaimer of California Attorney
    Although the above response is believed to be accurate, it should not be relied upon as any type of legal advice because the information provided is incomplete. It is intended to educate the reader and a more definite answer should be based on a consultation with a lawyer. No attorney client relation is formed with me without a written contract.

    Good Luck starts with a strategy and a plan.

    Robert J. Suhajda, MS,CPA
    Attorney-At-Law
    17721 Norwalk Blvd. #43
    Artesia, CA 90701
    562-924-8922

    Former financial auditor and controller. Admitted to US Tax Court, Income Tax, IRS representation, Fiduciary income tax returns, Estate and Gift tax returns,
    Homeowner Association Strategist.

    As a strategist, I analyze and integrate the operations, reserve study, budget, and financial statements into a unitary plan for 1 – 5 years, utilizing my experience as
    a former treasurer and vice president of a homeowners' association and corporate
    controller and auditor, to minimize homeowner association dues.

  4. Henry Daniel Lively

    Contributor Level 20

    Answered . I agree with attorney Rossmeissel. On the death of the first spouse if the property is held as community property the property steps up in basis to the fair market value of the property at the date of death or the alternate valuation date (if elected).

    Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.

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