Question:
We have a grantor irrevocable trust from our mother. Her house is for sale and we’re not sure if a step-up in basis is an option or do we carry forward her basis if we do a 1031 exchange?
Response:
I am assuming your mother has passed away. If so, then at her death, the house should have received a step-up in basis. The same features in the trust which made it a grantor trust for tax purposes almost certainly meant that it was includible in her taxable estate. As a result of being in her taxable estate, the property received a step-up in basis.
For federal purposes, it’s quite unlikely that this would mean an estate tax for your mother’s estate since, as of this writing, the threshold is $14 million. However, some states have thresholds as low as $2 million. To be 100% certain, you will need to show the trust to a tax attorney, but this result seems very likely.
It’s unlikely that you will want to do a 1031 exchange since this method of deferring the realization of capital gain is available only for rental property.
