Land Trusts And Tax Stamps
If I hold my property in a trust and sell it it seems that all that is necessary is a transfer of the beneficiary. If this is the case, the state/county would not know that the property has in fact changed hands, and no transfer tax would be due. Is this correct? Also, is it possible for someone to get a new mortgage based on that?
Thanks,
Andrew
Theoretically, your assumption of transferring the beneficial interest is correct. However, it is the trustee who has the power. To do this without incurring transfer taxes, the new beneficiary would have to trust you with the keys. In addition mortgaging the property could also be a problem. Most lenders I know will require the borrower to transfer the property out of the trust to obtain the mortgage.[ Edited by bnorton on Date 09/09/2004 ]
Be careful here. The answer will vary from state to state and county to county and city to city. I used to manage The Chicago Trust Company of California and we were Trustee of many Land Trusts. You are correct that when you sell your property you can merely transfer the beneficial interest in the trust to the buyer. This maintains the confidentiality of ownership and the buyer may like this. This transfer would avoid any "recording fees" associated with the recording of the Grant Deed, but most jurisdictions would still consider any transfer taxes still due and payable. The fact that the government does not know about the transfer because nothing is recorded does not mean that the tax is not due. You must check the requirements in the jurisdiction that the property is located in to determine if the transfer of the beneficial interest of the Land Trust would be exempt from taxation.
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Wexeter is correct. I should have used the phrase "avoiding transfer taxes" instead of "not incurring transfer taxes." Avoiding taxes doesn't mean they aren't due.
I guess I should also clarify why I said Theoretically you are correct. I wrote that because on a practical level it really doesn't work because of all of the other things you run into as a result of trying to avoid the tax man. The bottom line is you can pay him now or you can pay him later, but sooner or later he will collect.
I would sit down with your tax advisor and determine exactly what, if any, capital gain you would have. You received a step up in basis when you inherited the property, which means that your cost basis is equal to the market value at the date of death. You may not have any capital gain to worry about and you can sell at breakeven and then purchase what ever you like. It is important to sit down with your tax advisor though to make sure you know exactly what your tax situation is.
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