Tax Question

[al0061]

I just posted in the Introduction thread and explained that I have just completed a transaction with my family that has gotten me out of debt, with some cash left over.
I'm very confused over the potential tax implications, so I'll tell you the story (it's always a story, with me).

My father and uncle owned a vacation property in New Hampshire. It's been in the family since '37.

In 1987, my uncle sold out to my dad, and dad set up a trust for my sisters, step-mother and me. The trust is comprised of the real estate, a building and other related miscellaneous chattel. No cash. Dad died in 1988.

Part of the trust document established a method of paying yearly assessments to the trust to cover property taxes, maintenance and 'usage' fees. I've always made very little money, and have never been able to keep up with these yearly assessments. As of last year, I owed the trust 13K-ish.

My elder sister, with whom I don't get along too well, is the trustee. She never hounded or harassed, which is good, but her decisions on trust-related things were often not good. I had no say, nor visitation rights to the property because of my debt. She is also a control freak.

My share of the property amounted to 15.4 percent. The assessed value of the property as of 2003 was 450K or thereabouts. That would put the value of my share at 69,300, less my 13K debt.

I asked the members of the trust if anyone would buy me out. The trustee and my step-mother offered about 26K each, less the debt to the trust, and wouldn't budge on anything more. Since it was either accept the offer, or lose everything, bit-by-bit, I accepted the offer. This netted me 39,700 after my share of a real estate transfer tax assessed by the county in NH.

20K immediately went to paying off my personal debt. Hooray! Done deal.

My first tax question is this...
Since it was an inheritance, in the form of a trust consisting largely of real estate, but since Sis and Step-mom bought me out, and not the trust itself, what would apply? Capital gains? (What the heck are Those??) Nothing? because the amount is too low for Estate tax??

If it's capital gains, which I know nothing about, do I get to take into account my share of the property taxes I covered by deducting my debt to the trust from the final offer? And the real estate transfer tax?

If I don't know what the property value was in 1987, how can I possibly calculate capital gains? If that even applies.

Does anyone have any experience with this sort of thing?? I've tried reading everything I could on the IRS site, but there's so much I don't understand. (The term 'basis' is bandied about quite a bit, but I have no clue what it means.) My financial life has been simple. Get in debt, try to get out. Live paycheck to paycheck. Never owned a home, just a vehicle, nothing complicated at all.

Yes, I'm an idiot, and yes, I'm overwhelmed, but I want to be prepared before tax time comes around.
Any input would be appreciated.

I'll have other savings/investment questions in other threads. Please consider me completely clueless.

Thanks in advance.
al0061 - aka Torch

[terry1156]

This seems like a good situation to take to a tax accountant

Taxes are kind of a hobby for me, but I'm not an expert so please take everything with a grain of salt.

If I'm not mistaking, the basis would be what your share of the estate was worth when the estate was given over to you. That should be available to you in the estate records. So whatever that was and what you ultimately sold it for minus any expenses would be your gain.

[al0061]

Thanks terry.
I guess I'll go back to Sis and see if she can look back to the property tax records for 1988 for an official 'value'. Sounds like a good place to start.
I'll also start looking for a tax advisor.
Thanks again!
Nice to meet you.
al0061 - aka Torch

[terry1156]

Welcome to the site - it's always fun to see new faces. It's a friendly place and everyone likes to help out where they can.

Yes, as the trustee, she should have that information and you'll need it for this. Since you decided to sell at a discount, there may not be that much of a gain to report. That would be a good place to start.

[al0061]

Ooo. Hadn't thought of that aspect. That could be a good thing, under these circumstances.

What is the capital gains tax rate? Did I hear 28% somewhere recently?

Torch

[KathMorgan]

Several things, first "get ye to an experienced tax pro right away". Any Enrolled Agent (EA) should be able to help you out. Your "basis" in the property is the value of your share (15.4%) of the property on your Dad's date of death, which should be listed in his estate papers, trust papers or the probate of the estate. Then add your expenses since the inheritance (including the back taxes and fees you owed that were paid with the gain). This is your "adjusted basis". Then you take the sales price (26K x 2) subtract the expenses of the sale (the estate taxes you paid on the sale and any other expenses on closing except the back payments due since we already used them) and this is your adjusted sales price. Subtract your adjusted sales price from your adjusted basis and there is your gain or loss. I'm betting it's a loss. Now comes the tricky part the an experienced EA needs to explain to you (WAY too complicated for here), since you sold at a loss to a related party (sis and step mom) the loss may or may not be deductible. Drop me a line if you have questions. Cheers!

[al0061]

Hi Kath,
Nice to meet you.
Thanks so much for the advice. You've made me slightly more hopeful, and I'm understanding 'Basis' a bit better, thanks to you and Terry.
I've sent an email to Sis asking for information and copies of paperwork relating to this stuff. Hopefully, she'll be able to send copies of all my past 'assessments' (to save me from having to search for them all), and provide the value of the property in '88, from which I can extrapolate my share of it. That should also be available in the county's property tax assessment? Would that be right?

I never even considered that this could conceivably turn out to be a loss.
If it does turn out to be a loss, I'm not AS concerned about not being able to deduct it. More concerned if it turns out to be a gain.

I've never needed a 'tax guy' before. I assume that, since you're with H&R Block, that you might recommend them? Is this sort of advice expensive? I imagine it would be. Any other info on finding a good pro would be appreciated. I feel like a babe in the woods.

Please thank your offspring for his/her service, and thank you for the advice.

Torch

[KathMorgan]

As for recommending a tax pro, of course I'm partial to Block , however, I realize the level of experience within the company and in different areas of the country varies. If you would like to send me your zip code in email KathMorgan@aol.com I can check our database and see if there is someone suitable in your area. If not I have other resources to find non-Block EA's in your area as well. Block doesn't charge for advice, a tax pro will be glad to sit down with you and go over your things and see what if anything you need to do. The only charge should be if you actually have them do the return or any part of it. Drop me a line if you need help. and I will pass your thanks on to my son, I'm very very proud of him. Scared to death, but proud. Thanks!

[jmjj215]

Although tax pros charge quite a bit, it's worth it getting done right the first time, so don't necessarily let price be your only deciding factor!