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Avoiding taxes on a trust-owned home sale


Dear Tax Talk,
My grandparents are looking for advice. My grandmother is in an enviable position of wanting to sell her house for about $2 million. She wants to claim the tax deduction of $500,000 for her and my grandfather. However, the house is owned in my grandfather's name in a trust. They file tax returns individually although they have been married for over 30 years. They have lived in the house for over 25 years. Can they meet the primary residence capital gains tax exemption of $500,000 or can they transfer it to make that possible? Your help would be greatly appreciated. Thanks. -- Dylan

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Dear Dylan,
You're very astute to identify the problem. You didn't get into the terms of the trust though. Most older folks put their assets into living trusts to avoid the expense of probate. Also, probate proceedings occur in court and become a matter of public record, where living trusts are a good way to avoid this disclosure.

These trusts are usually called intervivos revocable trusts in that the person creating it does so in his lifetime and retains the right to change or revoke it during his life. At death of the trust creator, the trust becomes irrevocable and the assets are treated in accordance with the terms of the trust as set forth by the creator. In the tax field we call these grantor trusts while the creator (aka the grantor) is alive. Since the trust is revocable, the grantor is treated as the owner of the trust property for most purposes of the tax code.

Although not specifically addressed in the current law that created the $500,000 exclusion, under prior law, which is substantially similar with respect to the current law's ownership rules, ownership by a revocable trust does not preclude the gain exclusion. Under Internal Revenue Service Rev. Rul. 85-45 and PLR 8007050, the grantor was treated as the owner of trust property. The IRS concluded that the grantor/trust owner would be able to claim the gain exclusion on the sale of their residence. The result should be unchanged as that part of prior law is substantially the same after the expanded exclusion.

-- Posted: Dec. 3, 2004




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