Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

October 16, 2012
Do heirs pay tax on sale of inherited residence?

Q. My mother-in-law put her home in a family revocable trust fund. She took out a reverse mortgage to pay for home health aide. She passed away in 2010. The trust fund became Irrevocable upon her death. We couldn't sell the house, so all five siblings paid off the reverse mortgage (checks were written to the family trust fund). The house was appraised at $300,000 when reverse mortgage was taken out six months before her death. It has now appraised for $279,000. If/when the house sells, do the heirs pay capital gains tax on all the money that is distributed? Or, does each sibling get to deduct the amount that was paid toward the reverse mortgage first? Cathy, Roseville, CA

The first question that has to be addressed is will there be a gain or loss on the sale of the residence. In order to answer that question, you have to know two things: what is the income tax "basis" of the residence, and how much are the sales proceeds (net of selling expenses)?

The tax basis of property inherited from a decedent is usually the fair market value as of the date of the decedent's death. Assuming that there was not a significant decline in value between the date of the appraisal for the reverse mortgage and the date of your mother-in-law's death, the basis indicated by the appraisal would be $300,000. If you are concerned that there was a decline in value, obtain an appraisal as of the date of death.

Assuming a sales price of $279,000 and selling expense estimated at 7% of the sales price, the net sales proceeds would be about $259,500. That being the case, the residence would have sold for a loss of about $40,500 (the amount by which the basis of $300,000 exceeds the net sales proceeds of $259,500). Assuming no personal use of the residence post death by any of the beneficiaries, the loss should be treated as a long-term capital loss. This loss passes out to the beneficiaries upon termination of the trust, assuming no other capital gain income recognized by the trust. So each of the five beneficiaries would report a long-term capital loss of about $8,100 in the above example.

The distribution of the sales proceeds out of the trust would not be taxable to the beneficiaries, based on the above analysis. The residence sold at a loss, so the cash distributed represents a distribution of "corpus" from the trust, If the property had sold at a gain in the year of the termination of the trust, the beneficiaries may have had to pay tax on the gain, but not on their proportionate share of the sales proceeds.

The payment of debts associated with inherited property does not increase the basis, as a rule. By rule of law, the basis is the fair market value of the property as of the date of the decedent's death, in most cases.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.

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