The Listen to Lawrence Letter: Irrevocable Trusts and Capital Gains

February 6, 2023
November 17, 2022 • Volume 3 Issue 91
Dear Clients and Friends,
A home sale during life can lead to taxes…read on


Reading your latest question about the irrevocable trust owning the house, I have a question. My mom’s house is in a REVOCABLE TRUST and she is in an assisted living situation…what if she DEPLETES all her cash and the only asset she has left is her home valued at $500,000 which she bought for $5,000 in 1942. How much will she have left after capital gains are paid?  Is it $500,000 – $5,000 = $495,000, less $250,000 exclusion = $245,000, then 20% capital gains tax of $49,000 = $451,000 balance?



I do not believe this is how the numbers will end up. I will tell you that the answer will be the same whether the house is owned by mom, a revocable trust, or an irrevocable trust.


Mom paid $5,000. That number is her original cost basis. Through the last 60 years, I’m sure mom put money in the house to keep it in good shape. Of course, the house needed a new roof, windows, boiler, driveway, siding, bathrooms, kitchen, etc. Each capital expenditure adds to the basis. Perhaps over the last 60 years, she spent another $145,000? Her basis would now be $150,000 ($5,000 plus $145,000). The capital gain would then be $500,000 less $150,000 or $350,000. From this number we can subtract the $250,000 exclusion, leaving $100,000 subject to tax about at 22% (15% federal and 7% state) or $22,000. This would net $488,000 for mom’s care.


Also, if dad bought the house with her, he would also have his own $250,000 exclusion eliminating all tax. Or, if he died owning half, the basis on his half would get “stepped up” to his date of death value, again probably eliminating all capital gains taxes. Got it?


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Until next time...peace, health and happiness. Lawrence Eric Davidow