Reporting a sale of home.

[gats1016]

This is convoluted but I need to know the best way to report this.  My client put 16% of the down payment on her parents home.  The trust deed reads the mother, father and daughter as joint tenants.  Mother died in 2019 and nothing was ever done to change title.  Father died in 2020.  House is sold.  Seller is listed as my client as successor trustee of the parents trust.  Title to the house was never in the trust.  My client did not live in the home. My client received two 1099-S - one for 16% of the proceeds to her as the Successor Trustee of the Trust and the balance to her fathers SSN but to her as successor trustee of the trust. Do I report 16% of the purchase price as the basis on my client's return and then 16% of the proceeds (less costs) and use the $250,000 exclusion for a single person - or is she entitled to the exclusion?

[qbteachmt]

There is no exclusion if it wasn't her primary residence.

"EXCLUSION REQUIREMENTS

IRC section 121 allows a taxpayer to exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale"

Where did this Trust wording come from: "one for 16% of the proceeds to her as the Successor Trustee of the Trust"? What about this: "and the balance to her fathers SSN but to her as successor trustee of the trust." "Seller is listed as my client as successor trustee of the parents trust."

Someone gave the title company the info they used.

Are you sure that isn't "of the estate?"

Have you worked through the step up in basis for each death? Maybe there is no gain. Was it sold right away or held onto all year?

Or, there was a trust, but the title was never changed? Which makes it moot, like about 95% of private residential "trust" formations. They form a trust and don't put any property in it; or, it is supposed to be formed upon death, and you don't have that fact?

[sjrcpa]

Someone did something to change the title to the trust or the sale documents would not list the Seller the way you described.

[BobKamman]

@sjrcpa 

Absolutely right.  The OP tells us, 

"Seller is listed as my client as successor trustee of the parents trust.  Title to the house was never in the trust."

Best place to start would be the escrow agent that handled the transaction.  What might have happened is that Mom and Dad put their interest in the house into a trust, but the daughter did not sign off on that.  So when the house was sold, the deed and payment showed the seller as "Mary Smith, as Successor Trustee as to 84% and in her individual capacity as to 16%."  But does it really matter?  She gets stepped-up basis as of her father's date of death anyway.  

[BobKamman]

On second thought, maybe she doesn't get stepped-up basis on her 16% because she was no longer a joint tenant.  Her parents destroyed it when they put their share into their trust.  I would probably just argue "substance over form" and give it to her anyway.  

[gats1016]

Well the mom died in May of 2019 and the dad died in September 2020.  The deed on dad's DOD still read mom, dad, and client as joint tenants.  The attorney told my client she had to apply for an FEIN for the trust as everything that was not in the trust (the house) poured over into the trust.  All of the escrow documents list the seller as my client as successor trustee of the parents trust dated May 19, 2019, which is nine days prior to the mother's death.  The house never changed title.  I said it was convoluted.  I think I'm going to assign her 16% (her number) of the basis when purchased 2/27/17 and 16% of the profit less 16% of closing costs and pay capital gains on the difference, unless someone can convince me that's a bad idea. 

[BobKamman]

That's a bad idea.  Your client, according to your story, is the surviving joint tenant.  If she put a house she already owned into someone else's trust, she has a malpractice claim against the attorney, she doesn't have a tax bill (and later, a claim against you).  

[qbteachmt]

"everything that was not in the trust (the house) poured over into the trust."

But that would be only the Parents' ownership. The daughter would become 16% owner and her co-owner now is the Trust. The entire house wasn't the parents' and cannot be put in their trust. That would be stealing 🙂

"as successor trustee of the parents trust dated May 19, 2019, which is nine days prior to the mother's death"

Then Dad didn't own the house at death.

"The house never changed title."

Then the trust is a red herring in this discussion and doesn't apply to that Titled real property at all.

See what's wrong with your analysis? It's all over the place taking everything into consideration, even if it doesn't apply specifically.

"The deed on dad's DOD still read mom, dad, and client as joint tenants."

Then ignore anything about a Trust. The title company was told incorrectly.

You also never told us if this is Joint Tenants Right of Survivorship, or Tenants in Common; community property state?

The Mom died, so her share of the property went wherever it goes in this State relative to the Dad and the Daughter and the deed ownership. If the daughter is considered an Heir along with the Dad, they each got 50% of the Mom's share, for example.

"I think I'm going to assign her 16% (her number) of the basis when purchased 2/27/17 and 16% of the profit less 16% of closing costs and pay capital gains on the difference, unless someone can convince me that's a bad idea."

Send her to a lawyer.

[BobKamman]

@qbteachmt "Send her to a lawyer."

But not to the one who told her to deed her house into a decedent's trust.  

[qbteachmt]

"But not to the one who told her to deed her house into a decedent's trust."

Nope. Pick a Real one, this time 🙂

[gats1016]

Thank you for the input