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Visitor I

tax liabilities with respect to selling of property as the trustee of a trust

I have a very complex (at least it is to me) tax question. I am the trustee of my parents trust. I have 3 siblings and 2 pieces of real property that must be sold and distributed. My father passed over 25 years ago and my mother passed 8 years ago. myself and my sister took care of my mother for last 8 years of her life. my sister and her husband moved in to our mothers home to take care of her at night and I was there during the day. My mother passed 8 years ago and my sister continues to live in the home rent free.  we finally all have agreed to sell the properties. my sister that lives in my mothers home for the last 15+ years wants to purchase the home. the fair market value of the property is $215,000. the rest of the siblings have agreed to sell her the home for $145,000 basically gifting her $70,000 in equity. this property also has a equity loan of $45,000 which will have to be paid out of the trust. The other property which is right next door which is occupied by my brother who has been paying rent of $700.00 for the last 6 years wants to purchase that home. We all have agreed to sell my brother that home for $110,000 dollars and the home has been appraised at $140,000.

 

My mothers income when she was alive was $1200.00 per month which came from social security. the question at hand since my mother has passed we have never filed a tax return for the properties as the only income from the property was the rent of $700.00 my brother was paying to live there. The income from the property paid the equity loan payment with about $200.00 left over each month. the $200.00 that was left over was saved for repairs and upkeep of both homes. Does anyone know if the trust will be liable for any taxes on the properties or is there any penalties because we did not file taxes on the income for the properties? I am very nervous about distributing the cash assets from the sale of the 2 properties and then being stuck with a huge tax bill as the trustee? is there anyone out there that knows the laws concerning this type of situation. in case it matters I do live in California.

 

besides answering here in this forum whomever can answer this question can you copy the answer and any subsequent questions you might have to be able to determine our tax liabilities to my personal email which is [email address removed]

 

Thank you for any help or advice that you may give. This is killing me as I can find no tax professional where I live that can answer these questions.

1 Comment
Catalyst V

tax liabilities with respect to selling of property as the trustee of a trust

I was going to attempt what I hoped would be a useful response here, until I got to, "in case it matters I do live in California." CA tax laws are convoluted at best. Take any feedback or advice you get in this forum with a grain of salt.  Now, lets repost your query and leave out all the mish-mash that doesn't matter for anyone or anything.

- I am the trustee of my parents trust.

Do you mean that you are the legally appointed or recognized administrator of the trust? It matters.

- I have 3 siblings and 2 pieces of real property that must be sold and distributed.

Good luck selling the siblings. Smiley Happy

My mother passed 8 years ago. 

- my sister continues to live in the home rent free. 

we finally all have agreed to sell the properties.

my sister wants to purchase the home.

the fair market value of the property is $215,000.

the rest of the siblings have agreed to sell her the home for $145,000

basically gifting her $70,000 in equity.

Forget the "gift" stuff. Bottom line is, the house will be sold for $145,000. Period. End of story. Get any thoughts of "gift" out of this equation. It just produces unnecessary confusion.

this property also has a equity loan of $45,000 which will have to be paid out of the trust.

No problem for the trust, once the trust has sold the property to your sister. This is assuming that it is the trust that does "in fact" own the property, and not you or anyone else.

The other property which is right next door which is occupied by my brother who has been paying rent of $700.00 for the last 6 years wants to purchase that home.

He's been paying rent to the trust I hope (if the trust is the owner of the property).

We all have agreed to sell my brother that home for $110,000 dollars and the home has been appraised at $140,000.

At this point, appraisal value only matters to the lender your brother gets a mortgage from.

 

 the question at hand since my mother has passed we have never filed a tax return for the properties

Assuming you are the legally appointed and/or recognized administrator of the estate, you personally are the one who will pay for that out of your pocket with your money. The estate is not liable for the administrator not doing their legally required job of managing the estate to the benefit of the beneficiaries of that estate. This includes filing tax returns.

as the only income from the property was the rent of $700.00 my brother was paying to live there.

So that's $8,400 a year of reportable taxable income that the estate did not report to the IRS as required by law. Since it was for 6 years, that's a total of $50,400 that has not been reported to the IRS. Assuming you are the administrator of the estate, this is going to cost you dearly. It won't devastate you by far. But it will take a big chunk out of your cut of the distributed proceeds, if it doesn't take every penny of it.

Does anyone know if the trust will be liable for any taxes on the properties

Absolutely yes! The trust will be responsible for all taxes, to include back taxes not paid because returns were not filed, and any capital gains realized on the sale of the properties.

or is there any penalties because we did not file taxes on the income for the properties?

There will definitely be penalties, but not for the trust. The penalties are paid by the administrator of the trust who did not fulfill their legal obligation to the trust, thus causing fines, late fees and penalties to be assessed because of their failure to administer the trust in a timely manner.

I am very nervous about distributing the cash assets from the sale of the 2 properties and then being stuck with a huge tax bill as the trustee?

Oh the trust will pay the taxes, so you won't have any tax bill personally. But *you* will pay the late fees, fines and penalties. So if you already have a few thousand dollars of your own money banked away, nothing to be nervous about really. Just accept the fact that you are going to pay the fines, penalties and late fees with your money and if you've already got it banked, it won't devastate you.

is there anyone out there that knows the laws concerning this type of situation. in case it matters I do live in California.

 

All I have to go on is federal law. So it's perfectly possible that if federal fines, penalties and late fees don't cause you financial pain, then the state fines, penalties and late fees most likely will. So this is why you absolutely must seek the services of a CPA in your local jurisdiction who is intimately familiar with state laws on this. Now the cost of the CPA can be paid out of the estate and that's no problem. It's the fines, penalties and late fees that the administrator will pay out of their pocket.

Note that since the estate has not filed a tax return in the last 6-7 years, you flat out can not use TurboTax for the estate return. The TurboTax software is only supported for the current tax year and three years back. So if you go back more than three years and get that software, the required updates and corrections for it are not available and chances are extremely high that the 1041 estate return would be wrong because of it. So seek professional help, NOW.

I would suggest that absolutely NOTHING be sold to ANYONE until after you have the back taxes taken care of for the estate. Otherwise, you're taking an already complex and costly situation, and making it more complex and more costly to straighten out.  You may find that after all is said and done and the estate taxes are "caught up", that selling the properties at the prices quoted above will not leave enough to cover  the liabilities of the estate that have accumulated over the last 6-7 years, and leave anything worth distributing to any heirs or benefactors.