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Question:

We recently sold my father’s home which was in a trust. My sister lived with my father from the 1990 until my father died in 2005, and continued to live at the property until 2022 when the property was sold and the trust dissolved. The funds were distributed to all the brothers and sisters. We have been told that we have to pay capital gain taxes on the trust. Is this true?

Response:

Yes, except perhaps for your sister on her share. Assuming your father created the trust and transferred the home into either during his life or upon his death, it’s basis for purposes of determining capital gain was its fair market value on his date of death. Assuming the value of the property increased from that date until its sale in 2022, the capital gain would be the difference between the net proceeds and the 2005 value.

For instance, if the fair market value of the property was $250,000 in 2005 and you sold it for $500,000 in 2022, there would be $250,000 of gain. If there are five siblings, $50,000 of gain would pass through to each pro rata with your share of the proceeds.

Your sister, however, may or may not  be able to exclude the gain on her share of the proceeds depending on the terms of the trust. While you did not dissolve the trust until last year, revocable trusts often say that they end upon the grantor’s death. If that was the case with your father’s trust, then you have all been owners of your shares of the house since 2005. This would be helpful to your sister since homeowners can exclude the first $250,000 of gain on the sale of their home. The rest of you cannot take this exclusion because you did not live there. If the trust terms say that it continues after your father’s death, your sister also would not be able to exclude her share of the gain because in that case she was not a homeowner; the trust was the owner. So, the tax results for your sister depend on how the trust was written.

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