When homes are placed in a trust, the particular tax requirements for that property change if and when the property is eventually sold. Although a house sold from a trust will not incur any income taxes, capital gains taxation will almost definitely occur. Depending upon the specific nature of the trust, the responsibility for this capital gains tax will be allocated to any number of individuals. If the grantor of the trust is still living at the time that the property in the trust is sold, this will also significantly influence the responsibility for the capital gains tax payments.
When property in a trust is sold, capital gains tax will be the responsibility of the grantor, assuming they are still alive. If property is placed in an irrevocable trust, the sale of the property would create a tax burden for the trust itself.
Exploring Grantor Responsibilities
If the grantor of a trust has placed property within that trust and then decides to sell that property within their lifetime, they will be responsible for all capital gains realized by the property. This profit would be reported by the grantor on their own individual tax returns as capital gains. However, it is also important to remember that up to $250,000 of capital gains may be excluded from your tax return each year. If the grantor is married, they may exclude up to $500,000. With that in mind, it is highly possible that a grantor may be able to sell property from within their trust without incurring a significant tax burden.
Evaluating An Irrevocable Trust
If the grantor has placed their property inside of an irrevocable trust, the nature of this taxation may change entirely. An irrevocable trust does not offer a grantor the opportunity to claim rights to the property once it has been placed inside of the trust. With that in mind, if the property is eventually sold any capital gains would be the responsibility of the trust itself rather than the grantor. Because of this, an irrevocable trust will need its own taxpayer identification number.
Tax Concerns for Beneficiaries
When the grantor of the trust dies, it is quite possible that assets in the trust will be transferred to a designated beneficiary. At this point, the beneficiary will be personally responsible for any capital gains if and when they decide to sell the property. These gains would be reported on their personal income tax form. In similar fashion to a scenario in which the grantor sold the property, the beneficiary would also be able to take advantage of up to $250,000 capital gains exclusions for single individuals and up to $500,000 for couples. Fortunately, however, the beneficiary will not be required to pay any inheritance taxes on the property.
- IRREVOCABLE | definition in the Cambridge English Dictionary
- Trust | Definition of Trust by Merriam-Webster
- IRS.gov. "Basic Trust Law." Accessed Aug. 29, 2020.
- IRS. "Tax Forms and Instructions, Tax Rate Tables," Page 10. Accessed Aug. 30, 2020.
- IRS. "IRS provides tax inflation adjustments for tax year 2020." Accessed Aug. 30, 2020.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community. Ryan's work has been featured at Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.