capital gains on property sold in a trust

[user17524469257]

We sold part of our property that we live on for more than we paid for it and it is currently in a trust. The buyer is leasing the property until February 2026 when they plan to purchase it. What can we do to minimize our capital gains?

[FranklinF]

1. TRUST TYPES

• Revocable Living Trust: In a revocable trust, you, as the grantor (creator) and likely the initial trustee, maintain control over the assets, including the ability to sell the property. The sale process is similar to selling it directly as an individual.
• Irrevocable Trust: With an irrevocable trust, control of the property shifts to the trustee, and potentially the beneficiaries. Selling a house in an irrevocable trust requires strict adherence to the terms outlined in the trust agreement.
• Testamentary Trust: These trusts are established through a will and become active after the grantor's death. The sale process is guided by the trust's provisions, potentially requiring beneficiary agreement, says Point.com. 
  
  

2. TAX IMPLICATIONS

• Capital Gains Tax: Generally, selling a property in a trust can trigger capital gains taxes.
  • Revocable Trusts: The grantor is usually responsible for capital gains taxes and may qualify for the primary residence exclusion (up to $250,000 for individuals, $500,000 for married couples) if they meet the IRS's two-year ownership and use requirements.
    
    
  • Irrevocable Trusts: The trust itself is typically responsible for capital gains taxes. The primary residence exclusion usually doesn't apply to irrevocable trusts as the grantor no longer meets the ownership and residency requirements.
    
    

With the information provided above you should be able to have a general overview of the possible outcomes of this transaction. Please consult an Attorney or a  Tax Attorney about the specifics of your circumstances. For instance, the lease payments, are they actual lease payments or are they installment payments. The answer to this question would have different tax consequences and you can estimate your tax liabilities in each scenario using a tax software.

Tax Calculator 2024 

** Please say "Thanks" by clicking the thumbs up icon in a post
*** Mark the post that answers your question by clicking on the "Mark as Best Answer"

[dev145]

Whether capital gains taxes are owed when property held in a trust is sold and who pays them depends primarily on the type of trust in question: revocable or irrevocable. For revocable trust, if grantor is alive, trust is not count as a separate entity that means you will report any income, gains and loses on personal return. So if this is revocable trust and property that you will sale is/was your primary resident for 2 out of last 5 year, you will be able to exclude part of the gain (up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.).

If the trust is irrevocable trust, then there are couple of issue to think about. One issue is whether there is a step up in basis. and step up in basis will depend when the property was transferred to trust. From your question, I am assuming it was transferred while granter was alive then you do not get step up basis. Other issue is if irrevocable trusts are required to distribute income to beneficiaries every year, then that makes the trust a pass-through entity. Beneficiaries pay taxes on the income they receive from the trust. So in irrevocable trust, total tax liability will depend on who pays the tax.  Remember, irrevocable trust cannot claim exclusion above 205k and 500k exclusion. 

In order to reduce the total gain, make sure include any improvements (Not repairs and maintenance)  made thru out the years to increase your purchase price and remember to deduct any selling expenses. 

Please note above info. is just general information for each trust, please consult an Attorney or a  Tax Attorney about the specifics of your circumstances

Thanks for participating in TurboTax's Ask the Expert event today. I hope this information was helpful!

**Please cheer or say thanks by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

Regards,
TurboTax Expert

[M-MTax]

I agree with the advice to seek counsel from an attorney in your area.

However, I will add, since there appears to be some confusion, that irrevocable trusts can also be grantor trusts (partial or total). The test for whether a trust is a grantor trust or not is determined by control over the assets in the trust; irrevocable trusts can be grantor trusts (and, in fact , are as evidenced by the proliferation of IDGTs).