Urgent: Trustee's resp. on sales of sub-2 home - Posted by Ryan

Posted by Ryanwa on April 01, 2005 at 11:52:57:

Thank you so much for your words of wisdom. I like to be creative (haven’t done anything bad yet) but sometimes I could be too creative. I will keep everything straight and true so I could sleep better at night.

Urgent: Trustee’s resp. on sales of sub-2 home - Posted by Ryan

Posted by Ryan on April 01, 2005 at 08:41:54:

I bought a house sub-2 and put it in a trust naming my friend the trustee last November. I recently found a buyer and the transaction closed at escrow yesterday. I’m making a small chunk out of this transaction and have a few questions.

  1. During the signing, the escrow officer informed my trustee that even though she is not the beneficiary, since her name was on title, she is liable to pay for all the capital gain. Is this even true? I think the escrow officer is on crack. What can she, myself, or the owner do to make sure she is truly off the hook?

  2. Even though I asked the owner to assign the beneficial interest to me, I also asked her to sign a form instructing escrow to direct all proceed from the sales of this house to me. This was to prevent having to pay twice for the transfer tax, according to escrow (they told me that if they are aware of any transfer of beneficial interest greater than 50%, they are obligated to inform the state.) So during closing, I used this form instead of showing the “assignment of beneficial Interest” form. As the result, it seemed exactly like the owner put the house in a trust, then after the sales, gave all the proceed to me. Since she had lived in this house as her primary residence for more than 2 years, she does not have to pay capital gain up to 250k in profit. Does this mean I don’t have to pay taxes? All I have to do is ask the owner to sign a pre-dated promissory note saying she owed me some money… Is this even possible?


Trustee’s resp. on sales of sub-2 home - Posted by JT-IN

Posted by JT-IN on April 01, 2005 at 11:33:26:


The solution for the responsibility of the distribution of proceeds from closing is to provide the Escrow Co a SSN or TID for the Trust. As long as they have a number to include on a Form 1099, that relieves them and fulfills their responsibility. Most folks would use their own SSN, and that ends that.

Your second question involving the Seller handling funds and then executing a promisory note and negotiating funds to you, seems to make the process way too cumbersome… and would lead to seller trouble, before long. It is advisable to keep the knowledge of all this business of resale and closing out of their presense, or else you soon have a person saying, “That should be my money”.

You should have executed a POA at the time that you took the property subj to, on behalf of the seller, which authorizes you to handle any business as it relates to the property. That ends all communication and dealings with the Seller, and any chance for an eruption of emotions, leading to further problems…

Your tax liability should be determined by the amount you received, less any deductible business expenses. An attempt to shield this income from view, by running the transaction through the Sellers name, is a formula for disaster, IMO. This reminds me of an article that I read in this mornings newpaper… Three RE investors pleading guilty to Bank Fraud and Tax Evasion… I think they are all going to Prison. You think about it decide if saving a few dollars on taxes is worth that risk…?

What you need to decide is if you plan on being around this business very long… If so, then I advise you to make a habit, from day one, to do things the right way. God knows that there are enough traps and mine fileds for those that are attempting to be squeky clean, compared to those that aren’t, and will run aground sooner or later.

Just the way that I view things…


Re: Urgent: Trustee’s resp on sales sub-2 home - Posted by Randy (SD)

Posted by Randy (SD) on April 01, 2005 at 11:28:59:

Regarding your first question, if the deed was in the name of the trustee rather than the trust, I’m afraid your escrow officer is correct the trustee is liable for capital gains taxes. Next time you may want to put the deed in the name of the trust. That being said, I don’t know who would report the gain, the escrow company is not going to send a 1099 to the trustee.

The same would apply to the gain directed to you, no one is going to report it. However you are obligated to report the gain on your taxes, creating a predated promissory note in an effort to avoid your rightful tax obligation compounds the problems. I’m not advocating this-but suppose you did not report the gain, the only trigger would be an IRS audit. If you are audited and the unreported gain was discovered you’d be liable for penalties as well as the tax. Suppose you create your predated promissory note, the same event an audit occurs now you have committed tax fraud in addition to your other problems. There are literally hundreds of legitimate tax deductions and business expense deductions you can claim to offset your gain and potential tax liability. Learn how to use the tax laws to your advantage, or pay the taxes and consider it a privilege for making a profit. Search the archivist for posts on “taxes” or here is one of my posts:

the list of legitimate tax deductions for real estate investors is literally mind blowing! For starters go to www.IRS.gov and look for the following IRS publications:
IRS publications 527 - rental property
IRS publication 587 - business use of your home
IRS publication 544 - sales and disposition of assets
and IRS publication 946 - How to depreciate property

These are all Adobe PDF files, they’re all free and relatively easy to understand. The second phase of your tax savings strategy should be to have a financial accounting software such as MS money or Quicken or QuickBooks, enter every dollar spent into Quicken (I personally use Quicken and recommend it) when I suggest entering every dollar spent, I literally mean if you go to Kinko’s for a 49 cent copy… put it in there. I use a portion of my primary residence as my “home office” IRS publication 587 tells me I can legitimately deduct 35% (based on square footage used for business purposes) of my total housing expenses, all utilities, lawn care, snow removal etc. etc. additionally computers, fax machines, printers, digital cameras etc. are all depreciated for business reasons. My uncle lets me write off my Internet access, cell phones, land line telephone, depreciation on my second business vehicle, mileage… Are you getting the picture here? The point is you need to to have a way to track what those expenses are and easily incorporate them into your tax return. And added benefit of using Quicken or QuickBooks is TurboTax will automatically import all of your financial information directly to the appropriate schedules on your tax return. And I haven’t even touched on legitimate real estate related deductions such as cost of sales, closing costs, rehab expenses, depreciation of rental property. So get busy read the forms buy some software.