Tax and estate issue: the trust that wasn't...

[Jean Bolger]

This is a personal issue, not an issue with an investment of mine, but it involves rental real estate so I thought I'd ask for input from the community experts.

Several years ago my family went to a lawyer who specializes in elder law to get advice for my mother on asset protection, etc. He recommended she put her condo into a trust so that it would pass to the heirs (my sis and me) and avoid the need to sell if her other assets were depleted and her longterm care insurance used up. So that's what we decided upon.

Fast forward seven years. My Mom passed away in Dec 2012. When my sister and I went to sell the condo we found out, from the title search, that the condo had never actually been in a trust because the paperwork was done improperly. There were all sorts of variations in the name of the trust in the paperwork that made the filing void. (Sloppy work on the part of that legal firm's paralegals, basically.)

So there we were, with a contract to sell, a buyer and a closing date. And we don't actually own the place. After some legal consulting (with a new lawyer, obviously) we ended up having the buyer buy the place from the estate, and sis and I signed quit claim deeds (in addition) to prevent potential confusion.

Now, we are trying to figure out the tax consequences of what we've done. The condo had been a rental for 7 years while my mom was in assisted living, so it no longer qualifies for the homestead exemption. She had bought the place in 1998 for 104k cash. The depreciated value at the time of her death was 90k, we sold for 135k.

The estate will be filing taxes for 2013. My sister is the personal representative and does have an accountant that she's been using for a few years. I don't yet know what that accountant's take is on this, but I would like to hear opinions from an assortment of folks on what needs to be considered here. Especially folks who know real estate, and accounting issues. Frankly, after that lawyer experience I guess I am skittish about relying on just one "expert" opinion. Thanks for any input!