My mother in law passed away in 2009 and we sold her house in 2010. Am completing 1041. Is the tax basis for her home the Fair Market Value as of her date of death, the date the house was put into the trust, or the original purchase price paid for the house in the 1990's? We have a letter from a lawyer back in 2004 with an appraisal that showed the FMV of $210,000. But then he discounts it 15% before putting it into the trust, bringing the value to $178,500. We have no idea why he discounted it - would think he would want the basis to be as high as possible. I have a 1099 on the house sale that shows $185,000, net of all commissions.
Depending which basis we use, the house could have a gain or loss. If a loss, can I take it, if a gain, can I exclude up to $250K? The trust had no other income/loss in 2010 - do I even have to fill out 1041?
What kind of trust are we talking about here? If the house was put into a trust in 04 for someone who died in 09 AND the attorney discounted the value of the house, that tells me there is more to this than you've told us - quite likely more than you may know yourself.
The most frequent reason to see a home discounted when it goes into a trust is because the trust is a QPRT - Qualified Personal Residence Trust. This is TRICKY, HIGH END stuff NOT to be undertaken by the uninitiated. A QPRT allows someone to place a home into a trust, removing it from their estate, reducing the value to a residual amount which the remaindermen will inherit, and then leasing it back from the trust at FMV. There are fixed timing issues to be dealt with in a QPRT - for example, when established one must SET the term of the QPRT, typically 10 years or so. If the grantor (the person who put the house in the trust) dies before that term has elapsed then the trust unwinds and gets treated as though it never existed.
If it was any other kind of trust - maybe an irrevocable trust or a perhaps a retained life estate inside a trust - there could be other twists.
Your starting point is going to be to READ the trust document. THEN have it read by someone familiar with trust taxation (expect to pay for this, we don't work for free ). Then you'll know.
answered 14 Apr '11, 18:55