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Question:

I am a beneficiary in a nominee trust of a house and have a question about capital gains taxes. My parents bought the house in 1970, and set the trust up in 1990 for my 3 siblings and me, gifting it to us over a period of a few years so there were no gift taxes. Now, my sister is going to buy out my share. Is this is just a change in the beneficiary interests or is it a taxable event for capital gains? If it is taxable, is the basis based on the 1970 or 1990 value of the property? And do I get to use the $250,000 exclusion if the house was used as a vacation house?

Response:

I’m sorry, but the following answer probably is not what you want to hear. When property is gifted, the recipient receives what is often referred to as a “carry over” basis because he receives the property with the same basis as that of the original owners, in this case your parents’ basis. That would be what they paid to purchase the property plus the cost of any improvements they or you may have made, assuming you have records of these. Their basis would not have changed between 1970 and 1990 unless they made improvements to the property.

Now that you’re selling your share, your capital gain will be the difference between one fourth of your parents’ basis (plus any subsequent improvements) and what your sister is paying. It doesn’t matter how the sale is accomplished, whether by a deed or a change in the schedule of beneficiaries, it’s still a sale. You will not be able to exclude the first $250,000 because that tax benefit only applies to the sale of your personal residence, not a vacation house.

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