If a Trust sells a home, can the Trustee take the $250,000 capital gain exemption if the Beneficiary lived in the home until the sale?

[Critter1]

Revocable trust?

[tonybono]

Irrevocable Trust

[Critter1]

The exclusion is generally $250,000 but can be increased to $500,000 if the sellers are married and file a joint tax return for the year of the sale, and both have met the use test for the house. Generally the exclusion is available only to an individual, because an entity, such as a trust, cannot use a house as a principal residence.

[randy2]

1. If the grantor has died and the home is being sold by the trust after their death (and the trust has become irrevocable at this point), does Section 121 exemption still apply?
2. If Section 121 exemption does apply, does that prevent the preparer from claiming a capital loss if the sales price is less than basis?
3. If the price is discounted by 25% off of FMV by a sale to the surviving significant other (not a spouse, not a beneficiary of the trust, and not a community property state), does this prevent taking a capital loss if answer to 2 above is "no"? 4. Does the trust use FMV on date of death for basis?

[mbatson13]

This maybe too little too late, but upon death of the owner, the property gets a step-up in basis equal to its FMV at the date of death of the grantor of the trust. This effectively makes the cost basis the same as the sales price so there's no gain.  You wouldn't use or need to use Section 121 to eliminate the capital gain because of this act of law.

[Mike7388]

What if the home deposited into the trust, and occupied by the depositor, can be removed (reacquired) from the trust by the depositor and replaced by replacing it with property of similar value?  In that case, is the $250,000 preserved?

[ronlevy111]

 "Depositor" isn't a valid term. You mean Grantor, which, if deceased, can't do anything.

No I believe it wouldn't be a sham if, as a Trustee,  you simply did the transactions through a 1031 exchange. No real way of "removing" it from the (now irrevocable) trust without considering it a sale, so just sell it and buy another ("replace") property within the 1031 time constraints.

[Billramsey53]

The original question did not specify whether the trust was revocable or irrevocable. Thus, the reply only provides a partial answer to the question and is correct in stating that an irrevocable trust does not qualify for a Section 121 capital gains exclusion. However, if a house is held by a revocable trust and served as the principal residence for at least 2 out of the preceding 5 years as the tax filer’s (trust owner’s) principal residence, it fully qualifies for the Section 121 exclusion ($250,000 for single and $500,000 for married filing jointly). The grantors of a revocable trust are considered the owners of the property for Federal tax purposes.