How to treat an owner financed home in inheritance?

Dustien, the payments will be income to the Trust until the land contract is paid off, and those funds could be taxable depending on what deductions the Trust might have to offset them.

I think this is worth discussing with an estate planning or real property attorney for that reason. I would ensure also that the attorney has significant trust management experience. If your counsel is with a law firm, there's often a real property section complimenting the estate planning and other practice areas of the firm.

Since the land contract is a Trust asset, it shouldn't be affected by Probate.

What I would have an attorney specifically consider is whether or not the clause mandating continuation until pay-off time is iron clad, although I suspect that some wise planning went into this issue. Apparently your father wanted the buyer to have enough time to pay off the land contract - he must have wanted this person to have the property. After reading your other post on similar issues, I think your father was a very wise and proactive man.

In the interim, the payments would be allocated according to Trust terms - split between you and your brother. When you file the 1041 Trust tax return at the end of the year, you'll prepare Schedule K-1s for each of you. That will reflect the split allocation for you and for your brother.

What I do NOT know is how to treat this in the 1041 though. It would be a payment in and payment out, so it might offset any tax on the payments as income. It's been years since I did a K-1 and I don't recall specifically but I believe any payments received (such as for sale of a vehicle) were treated as Trust income as well as Trust payments to the heirs. So the net effect was $0. But this is based only on vague memories and should be clarified by a Trust attorney.

In the meantime, you can split the payments when received and disburse 1/2 each to you and your brother.

If you do see an attorney, please let us know what the advice was. This is an interesting situation.

I think AK Daughter would probably have some good advice on this situation as well.

D - as 2016 taxes will reflect dads death, I'd suggest you get a referral to a really good CPA for this tax year. Start gathering documents now so it's good to get filed in Feb after dad gets any 1099s. A trust or real estate atty will likely have a short list of CPAs.

It's going to cost for '16 but you just may be able to file 2017 - 2019 on your own by repeating the pattern set by the CPA. Then have CPA do the 2020 one when ballooned off happens.

About K-1s (form 1065) I get them from S corp (100%) & from LLCs (partnership). Whatever K1 shows (+ or -) goes into your 1040. So if you can get everything dad done & filed feb or march, it will be better so your not rushed on your personal taxes. Good luck, first year is the hardest.

Thanks, Igloo, for pointing out that income shown on K-1s needs to be incorporated into the heir's individual 1040.

And you're right - the first year REALLY is the hardest.

Guest - totally beyond sticky. I wouldn't be surprised if D ends up needing legal & CPA both for Ohio & Texas. For TX, the "foreign" will aspect (for those things that d's dad didn't include in the trust) could require filings in OH by OH legal to docket into TX probate court by TX probate atty. Decades ago I was executrix for an TX aunt (back when females were still called executrix, LOL!) & pretty convoluted estate as prior marriages with no probate done..... Lineal heirship issues plus Land, O&G crossing state lines for NM & OK. OK very much required OK atty, notary, etc for anything. Makes me tired to remember. It's stuff like this that creeps up costs and time.

D - your dads trust, what's its finding source? If its been his SS or retirement that $ has stopped. Was there a hefty bank account POD to you to draw from? Is it that the land contact payment is the sole $ coming into the trust? If you can try to put paper to pencil as to what the costs are looking like to get the next 6 months done... Like atty fees, courthouse filing fees, CPA, your travel expenses, bonding fees. So I'd dad estate / trust can't cover the estimated costs plus 20%, just who is going to front the $? I'd really suggest you & bro each put up 50% of the estimated and you add in the 20% extra and you have some sort of memo of understanding on this and the $ goes into an account January 2, 2017. $ makes family act odd.... It may not be your brother... But his wife or a son in law who starts carping about how your doing things and spending $.

Also please do as Garden mentioned something to remind Akron that the land contract is totally binding and Akron must continue to pay and understands that Dads death does not alter the land contract. My cncern is this....Sometimes family "sells" property via a SCIN - self canceling installment note. Its a way to pass down stuff with minimal $ actually being paid - totally legit (but complex) and done often by the generational wealthy. You just want to make sure that Akron doesn't think the debt is gone as dad is gone.

The loan payments are made to the Trust, deposited in the Trust and the Trust remains active for the next four years, through 2020. See your tax preparer.
You are probating Dad's estate, which is separate from the Trust, which has it's own taxpayer ID number, like a separate "person", with a separate tax return.

Ok, here's another problem. Where do I get the CPA? The house is in Akron, where dad lived before he got sick. Then he lived 3 years with my brother in Texas. I, myself, live in Arkansas. Dad has used H&R block for the last 8 years for his taxes, first in Akron, then in Texas. Should I keep using them or find someone else, and if so, in Akron, Texas or Where I live? I think this is going to be more complicated then I was hoping it would be...

GardenArtist, the person who bought dad's house in Akron was the son of the neighbor and dad wanted him to have it, knowing he couldn't get it financed for a few years because of credit problems. That's why he gave him the 5 years needed to get it financed. There's still 3.7 years of that time left. I wouldn't want to force acceleration of the contract now, even if I could. He is paying a higher interest rate, and he knows that it's to his advantage to get it paid off as soon as possible. The fact that he's not done so tells me he can't yet and so we'll just have to wait for the baloon payment to come due.

In the meantime, it's my understanding that, though the principle of an inherited home is not taxable, interest is. The largest portion, of not all, of each payment at this stage is interest, so therefor taxable, right? If the payments are split between the 3 of us, then would we each be responsible for paying taxes on our shares going forward (knowing Dad's trust is responsible for 2016 taxes)?

Yes, until close to the end, dad was very pro active in his finances...the last couple of months it was getting hard for him though, as I'm sure it will for all of us. Bless his heart...but I knew he had trust that I would do my best to see to it all his wishes were carried out and I know that gave him some peace. I just hope I can...

I'm so glad you guys are all here to bounce this stuff off of. Thanks so much!

GardenArtist, yes my parents house was sold.... the loan I had mentioned was on my own house, to which my parents were the "bankers" so my mortgage payment went to them. So after Probate I will become the "banker" to my own loan, thus I would need to pay myself.

Life gets so complicated after the fact.

FF...so glad to know I'm not the only one who's has something like this happeing. I appreciate your insite into the matter. GA....thanks too, for all the advice, and yes, my dad was very considerate. He was a pretty nice guy even though his old age did tend to make him a more then a bit cranky and unreasonable at times. He would get so frustrated, knowing that nothing he did was going to get him back to his "previous" happy life once he became sick enough that he could no longer live alone. Can't blame him for that....or anyone for that matter. You guys have all given wonderful advice when it came to dealing with the various problems we encountered along the way with him. I'll never be able to thank you all for that.

Igloo, I will be visiting Ohio in two weeks to spend a week with my best friend from high school. I will visit the buyers and let them know that dad has passes away and that they need to continue just as they have been, only they will need to add a bit to the monthly payment as what they are paying is not enough to completely covering the property taxes. The tax rate went up last year but dad just let the increase slide. I think, as trustee, I need to make them aware of the adjustment as the taxes will be coming out of the trust.

There is money in a bank account in Texas that was not in the trust. There we ad to get a lawyer and are doing a minument of title for probate.

Since the house is in Ohio, which is the same state as the trust is in, I don't think there will be a state to state problem with the trust. The only thing in the trust now is the home and all that will be coming into the trust will be the payments and anything I put into it as Co-Trustee.

There is enough money in the Texas account to cover the taxes and expenses it's going to cost to get the taxes done. I plan on holding out what I feel will be needed for trust expenses once that bank account is available to me before dispersing the rest, which I will then deposit into the Trust. I'll pad it a bit, knowing that once all the income taxes and such are taken care of I can then disperse it to my brothers and myself.

I will probably first talk to Dad's HnR block people since he sold the house last year so they had to deal with the sale of the house on the taxes somehow.... and go from there... If I don't feel them competent, then I'll talk to our Texas Lawyer who's doing minament of title and get his recommendations...

The Minument of Title will Probate Dad's will, which said anything not in the trust is to be swept into the Trust by the Co-Trustee, meaning what's in the bank in Texas will then be available for me to ask for a transfer from that bank's account into the Trust Account at the Ohio bank. Also dad's car will go into the trust so that I can sign it over to my sister in law and brother per dad's request. I'm hoping this is how it's going to all work out, anyway... And hopefully HnR block will know how to deal with the rents from the land contract.. Brother...what a job this all is... I'm glad I've got all of you to bounce it all off of for sure!