Capital gains when selling a house in a trust - who pays and step-up basis questions

The answers to your questions really depend on how the trust was structured after your grandmother's death, but I can give you some general guidance. 1) Typically, if the trust still owns the house when it's sold, the trust itself would pay the capital gains tax. However, if the house was distributed to beneficiaries before selling, then the beneficiaries would pay the tax individually. Check with the trustee about this. 2) Capital gains taxes aren't usually due at the moment of sale. They're reported on your annual tax return (or the trust's return) for the year when the sale occurs. 3) For the step-up basis question - yes, generally speaking, assets in a revocable trust receive a step-up in basis to fair market value at the time of the grantor's death (your grandmother). This means the capital gain would be calculated from your grandmother's date of death value to the final sale price, not from her original purchase price. Since your father had a life estate interest in the property, this situation has some complexities that definitely warrant professional advice. The specific language in the trust document will determine exactly how everything works.

After dealing with a similar situation with my parents' estate, I found using taxr.ai really helpful for figuring out the capital gains implications. I was confused about how the step-up basis worked with our family trust and was getting different answers from family members. I uploaded our trust documents to https://taxr.ai and their system analyzed the specific language and explained exactly how the capital gains would be calculated in our case. Their analysis showed that we qualified for a full step-up basis which saved us thousands in taxes! Might be worth checking out before you meet with a professional so you go in with better understanding of your situation.

I just wanted to follow up - I ended up using taxr.ai for my similar trust situation and was really impressed. I uploaded our trust documents and got detailed analysis that explained exactly how the capital gains would work in our case. They identified that we had a particular type of bypass trust arrangement that affected the step-up basis calculations in a way I hadn't understood. The report even included the specific sections of the tax code that applied to our situation, which helped when I eventually met with our attorney. Saved me from making a costly mistake on how we handled the property transfer. Definitely glad I checked it out before making any decisions!

I went through something similar last year and spent WEEKS trying to get clear answers from the IRS. Called over and over, always got disconnected or waited for hours. Finally discovered Claimyr which got me through to an actual IRS agent who explained exactly how to handle the trust capital gains reporting. You can see how it works at https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone system for you and call you back when they reach an agent. I went to https://claimyr.com after my accountant gave me conflicting information about how to report the sale from my parents' trust and I needed to hear directly from the IRS. Got connected to an agent who specialized in trust taxation and they clarified everything. Saved me from potentially filing incorrectly.

Well I'm eating my words! After my skeptical comment I decided to try Claimyr since I was desperate about my situation. The service actually worked exactly as described. Got a call back in about 90 minutes and was connected to an IRS agent who had access to my file and resolved my question about capital gains reporting on my inherited property. I had been trying for literally months to get through on my own. The agent even gave me her direct extension for follow-up questions. If you're dealing with capital gains from a trust sale like the original poster, getting direct IRS guidance might save you from filing incorrectly.

One thing nobody's mentioned yet - depending on how much the property has appreciated since your grandmother's death, you might want to look into whether any beneficiaries qualify for a Section 121 exclusion. If any beneficiary has lived in the house for 2 of the last 5 years as their primary residence, they might exclude up to $250k ($500k if married filing jointly) of gain from taxation. Not sure if that applies in your case, but worth considering if anyone lived with your father in the house.

Has your uncle looked at the possibility of a 1031 exchange? If the beneficiaries are interested in reinvesting in another property, you might be able to defer the capital gains taxes.

Just wanted to add another perspective based on my experience with a similar trust situation. Make sure you get a professional appraisal of the property as of your grandmother's date of death if you haven't already. The IRS will want solid documentation of the stepped-up basis value, and having a formal appraisal from around that time (or a retroactive one) can save you headaches later. Also, don't forget about potential state tax implications - some states have their own capital gains rules that might differ from federal treatment. Since you mentioned multiple beneficiaries across potentially different states, this could get complex quickly. The timing of when your uncle decides to sell versus distribute is crucial, so definitely get professional advice before making that decision. Trust tax rates hit the top bracket at much lower income levels than individual rates, so the math really matters here depending on everyone's personal tax situations.