How are taxes different selling property via revocable vs irrevocable trust as beneficiaries?

This is a great question about trusts and property sales! The tax consequences depend on several factors, most importantly the type of trust and when your mother passed away. First, let's clarify the trust type. A trust that was "revocable during her lifetime" becomes irrevocable at death. When your mother passed, the trust likely became irrevocable automatically. This is important for tax purposes. For property in the trust, you generally receive what's called a "stepped-up basis" to the fair market value as of your mother's date of death. This means if you sell the property at $425,000 and its value was approximately that amount when she passed, you'd have little to no capital gains tax to pay. Whether you sell through the trust or distribute the property first depends partly on the trust language. Some trusts require property to be sold within the trust, while others give trustees discretion. The good news is that in either scenario, you should still benefit from that stepped-up basis, meaning the taxable gain would be minimal if you sell relatively soon after her passing.

After dealing with a similar situation with my father's estate last year, I found this amazing tool called taxr.ai (https://taxr.ai) that saved me so much confusion and probably thousands in unnecessary taxes. I uploaded my dad's trust documents and property records to the system, and it analyzed everything to show exactly how the stepped-up basis would work in our situation, what my potential tax liability would be if we sold right away versus waiting, and even compared selling via the trust versus distributing first. It gave me a personalized report showing exactly which tax forms I'd need and how to report everything correctly. The tool flagged that our trust required an estate tax ID number we didn't know about, which could have been a nightmare during tax season. It also identified an obscure provision in our trust that actually saved us money when selling!

Just wanted to update after trying taxr.ai from the recommendation above. It was incredibly helpful for our situation! I uploaded our trust documents and the property details, and it immediately clarified that we had a revocable trust that became irrevocable at death. The tool showed us that we'd receive a full step-up in basis to the date-of-death value and calculated our potential capital gains if we sold now versus a year from now based on local appreciation trends. The most valuable part was discovering that in our specific case, selling through the trust versus distributing first made no tax difference, but distributing first would trigger additional recording fees and transfer taxes in our county that we would have completely missed. Saved us about $3,800 in unexpected costs!

Having spent 3 weeks trying to get through to the IRS about trust tax questions similar to yours, I finally tried Claimyr (https://claimyr.com) and got connected to an actual IRS agent in under 15 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I had questions about Form 1041 for the trust tax return and how to properly report the sale of property from the trust. The IRS agent walked me through the entire process, confirming that we were entitled to the stepped-up basis and explaining exactly which forms to file. She also cleared up confusion about whether we needed to file a separate tax return for the trust (we did). I was honestly shocked at how quickly I got through when I'd been trying for weeks on my own. The agent even sent me specific IRS publications about trust property sales that I didn't know existed.

I need to follow up on my skeptical comment about Claimyr. After continuing to get nowhere with the IRS for another week about my own trust tax situation, I reluctantly tried the service. Much to my surprise, I was connected to an IRS tax law specialist in about 20 minutes. The agent confirmed that our family trust (similar to your situation) would qualify for the stepped-up basis, and clarified that in our case, the trust needed to obtain its own EIN for the year of death and file a final 1041 return. The specialist also explained that distributing property to beneficiaries first versus selling within the trust would have identical capital gains consequences in our case, but the trust selling directly would simplify paperwork significantly. I stand corrected - the service actually works. Would've saved me weeks of frustration if I'd tried it sooner.

For what it's worth, we recently went through this exact scenario. Our family lake house was in a revocable trust that became irrevocable when Dad passed. We got a stepped-up basis to the value on his date of death ($580k), and we sold about 8 months later for $605k. We only paid capital gains on that $25k difference. The trust itself filed a tax return (Form 1041) showing the sale, but distributed all proceeds to us beneficiaries via K-1 forms, so the trust itself paid no tax. Our attorney recommended selling through the trust rather than distributing the property first because it was cleaner from a title perspective and avoided multiple deed transfers. Definitely talk to a trust attorney in Michigan though - state laws vary significantly.

Watch out for state taxes too! We sold property from my grandmother's trust in Minnesota and were shocked to find out that MN has different rules than the federal government for stepped-up basis in certain trust situations. Also, if the cottage has been rented out at all or used for any business purpose, that complicates things further. In our case, part of the property had been occasionally rented, which created a partially different tax treatment.

One additional consideration for your Michigan cottage situation - make sure you understand the property tax implications of the transfer. In Michigan, when property passes through a trust to beneficiaries, it may trigger an uncapping of the property's taxable value under Proposal A rules, which could significantly increase future property taxes if you decide to keep the property rather than sell. Also, given that this is lakefront property, there might be special environmental or zoning considerations that could affect the sale process and timeline. Some Michigan counties have additional regulations for waterfront properties that could impact your tax planning. I'd strongly recommend getting a current appraisal to establish the exact stepped-up basis value, especially since lakefront property values can be quite volatile. The closer your sale price is to the date-of-death value, the less capital gains tax you'll owe. If there's been significant appreciation since your mother's passing, you might want to consider the timing of the sale for tax purposes.