Selling property... Sister can't report sale to IRS this year.

[Jonathan Ward]

Hi,

My sister and I rent a property that's in a Revocable Trust. Our tenants have given notice and will be out by 5/1. Being an 87 yr old home, I would like to sell the property. She and her husband have been hit hard by Covid and have had to convert some of their IRA retirement savings to cash this year. Unfortunately I just learned that for tax purposes, they can't absorb a windfall payment (about 275k) on their 2022 tax return. It would invoke large tax penalties given their recent financial moves.

Is there a way the home can be sold this year, and they can put off reporting their 1/2 of the sale to the IRS until next year? Maybe putting their proceeds into a temporary "holding" account, escrow or banking method?  

I know it sounds strange but I swear it's all legit. We can get top dollar for the home this year and as 1/2 owner, my financial security is affected by this. In fact, I'm currently doing exterior renovation to the home myself at no charge to the Trust to improve curb appeal.

Thanks for any suggestions 

[Scott Jensen]

I don't agree with the advice that @Lynnette E. posted. If the trust is revocable the taxes are passed through to the beneficiaries of the trust. If it is taxed in the trust, (probably an irrevocable trust) it will be subject to the HIGHEST FEDERAL TAX RATE OF 37%!  If the trust is irrevocable and passing untaxed income to beneficiaries it is generally taxed at ordinary income rates rather than long term capital gains which could be pretty bad. I am no attorney, but I can't see a reason a trust would be helpful.

See if they can use proceeds from the sale of the property to repay the distribution (assuming they did a COVID related distribution.)  This will get their taxes back down to a lower rate to offset the taxes from the sale. They can also use the funds to contribute to 401(k)s and HSAs to reduce their income and the taxes on the sale of the property.  Otherwise you could try to do installment sales or 1031 the property into several smaller properties (maybe DSTs?) to spread the sales out over multiple tax years. If they are charitable they could use the funds to donate to a Donor Advised Fund to offset income and have a large charitable pool to donate whenever they wish.