Selling assets in a living trust

May 1, 2003
Transferring property into a revocable living trust has no effect on federal income or estate taxes. Even if the trust is set up in the name of only one spouse, you will be eligible for the $500,000 gain exclusion.

Charles Blair, DDS & John McGill, MBA, CPA, JD

My wife and I have put most of our assets into a revocable living trust, although we still own our home jointly. If we transfer our home into the trust and later sell it, are we still eligible for the $500,000 gain exclusion? If not, will our heirs owe capital-gain taxes on the gain above our original purchase price?

No. Transferring property into a revocable living trust has no effect on federal income or estate taxes. Even if the trust is set up in the name of only one spouse, as a married couple you will be eligible for the $500,000 gain exclusion, provided that you have used this home as your main residence for at least two years.

Moreover, if you keep the house until the date of death, it will receive a "stepped up" basis to its fair market value at the date of death. Accordingly, if the home is then sold, there would be capital gains only to the extent that the net sales price exceeded the value at the date of death.

At the end of the rental period, the tenant is then evicted. The doctor moves into the property and then converts it into his personal residence. After living there at least two years, the doctor can sell the property and exclude up to $500,000 of taxable gain. In a tax-free exchange, the property received in the exchange (e.g, condo in Florida) keeps the same tax basis as the original office building for which it was swapped. Therefore, upon the later sale of the Florida condo, the gain which can be received tax-free includes not only any appreciation from the sales price following the date of the purchase, but also all of the previously untaxed gain from the prior Section 1031 exchange.

I am in the process of selling my practice and related office building to my current associate. Because my office building is fully depreciated, I will have to pay over $100,000 in federal and state income taxes on the gain. Do you have any tax-saving ideas?

Absolutely! says Blake Hassan, a CPA and tax attorney with McGill and Hassan, P.A. ((704) 424-5450), specializing in representing sellers in practice transitions. Hassan says that doctors can defer — or possibly even eliminate — taxes on the sale of their office building through structuring a Section 1031 tax-free exchange.

I used my credit card to make a last-minute charitable contribution in December of 2002. However, I did not pay my credit card bill until January. Can I still claim the deduction on my 2002 tax return?

Yes. You should deduct the gift in the year you make the transaction that results in the charge. But if the amount is $250 or more, you should obtain a written acknowledgement from the charity by the time you file your tax return. The acknowledgement should indicate how much you gave and whether you received anything of value in exchange

I gave my broker instructions to roll over my money from one IRA account into another, but instead, he mistakenly put it into a regular account. Will I owe taxes and early withdrawal penalties?

Although the IRS says it accepts no excuse for failing to complete a rollover on time, the Tax Court has allowed a rollover to be completed late in a case like yours where a broker failed to follow instructions. The Court said that a taxpayer who did everything necessary to make a rollover should not be penalized for the broker's error. Case: William Wood, 93 TC 114.

Dr. Blair (left) is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. McGill is a tax attorney, CPA, and MBA, and is the editor of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($195 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, or call (704) 424-9780.

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