I am the trustee for my mother’s revocable trust, and my brother is a backup trustee. When she passes, I plan to sell her house and distribute the proceeds. My younger brother currently lives in the house and takes care of her.
I want to sell the house as it is very neglected, but it’s in California and has appreciated by approximately $700,000 over the last 40 years. It is currently held in that trust. Will the sale be subject to capital-gains tax?
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Yes, you may have to pay capital-gains tax even though you will inherit the home at market value, but you may not be slapped with a huge tax bill.
When you and your brother inherit the home after your mother passes, you will benefit from what is called a “step-up basis” under which the home will be transferred to the beneficiaries at its current market value.
When you sell, your “capital gain” will be the difference between how much the home is sold for versus how much the home was valued at on the date of your mom’s death, Karen Fierro, partner of trusts and estates at Wiss & Co., an accounting firm based in Florham Park, N.J., told MarketWatch.
You can reduce that capital gain with expenses incurred when selling the home, such as commissions paid to a real-estate agent. And if you sell the house within a few months, the sales price of the home is considered to be what the home was valued at when you inherited it, Fierro added.
So even though the home has appreciated in value considerably, you probably do not have to pay a lot in taxes on that $700,000 gain over the last 40 years.
The capital-gains tax only applies on the appreciation in value after you take ownership of it. If you wait, the home may appreciate under your ownership, and you would be responsible for capital-gains tax on that rise in market value.
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