10 Jul Will we really pay 39% in tax on this home sale?
Q. We’ve heard that it’s best to put your house in a trust to save on taxes. We put my mom’s house in a trust for this purpose. She’s been moved to a senior care facility and we need to sell the house to pay for her care. Now we’re being told that the laws have changed and we’ll owe 39% of the sales price in taxes. Please help us straighten this out.
A. We hope your mom is comfortable in her new home.
About her home that you’re planning to sell? We have a few things to note.
“They incur more taxes because a trust’s tax brackets are much steeper than an individual’s tax brackets,” Kiely said.
He notes that you did not put mom’s house into a trust. Your mom put her house into the trust.
When you put assets into a trust you are giving up title to those assets, Kiely said, and the assets are now the property of the trust and the trust’s tax basis is the grantor’s — your mom’s — basis.
Kiely said you noted that the laws have changed, but he said they haven’t.
“If the trust sells the house, the transaction must be reported on the trust’s federal and state income tax returns,” he said. “The difference between the net sales price and the cost basis is a capital gain.”
When someone sells their home, they are entitled to a $250,000 home sale exclusion if they are single, or $500,000 for a married couple, under Section 121 of the Internal Revenue Code, Kiely said.
“You are eligible for this exclusion if you meet both the ownership test and the use test,” he said. “Mom is not eligible for the exclusion because she does not own the home — the trust does.”
He said the trust does not meet the use test because the trust is not a living being.
“There is a chance to get out of this mess. On occasion people, with the help of lawyers, create trusts. But they fail to actually fund the trust,” he said. “The trust says it owns certain property, but the bank account, brokerage account or deed is still in the grantor’s name — the grantor still owns the property.”
Kiely suggests you go to the county courthouse and look at the deed.
“Whose name is on the deed? If mom’s name is on the deed, then she owns the house not the trust,” he said, adding that your mom should find a new attorney with experience with trusts to help her with future transactions.
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This story was originally published on July 10, 2023.
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