Do You Need to Pay Taxes When Selling a House in a Trust?
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Selling a house is a major decision, but when the property is held in a trust, things can get a little more complicated, especially when it comes to taxes. Whether you will owe capital gains tax, estate tax or no tax at all often comes down to the type of trust and who is benefiting from the sale.
How Trusts Affect Home Sales
A trust is a legal arrangement that allows a trustee to hold and manage assets on behalf of the beneficiary. Trusts are common tools in estate planning because they can avoid probate, provide tax benefits and ensure that property is distributed per the grantor’s wishes.
Not all trusts are created equal. A revocable trust allows the grantor to make changes, including selling the home, during their lifetime. An irrevocable trust cannot be changed without the beneficiaries’ consent, which can make selling a house more restrictive. A testamentary trust is created through a will after someone’s death and has its rules for managing or selling property.
Taxes You May Face When Selling
The most significant tax consideration in most home sales is capital gains tax, which is the tax on profits from selling an asset. If the house was in a revocable trust and you lived in it as your primary residence for at least two of the last five years, you may qualify for a capital gains exemption of up to $250,000 ($500,000 if married filing jointly). In that case, only gains above the exemption will be taxed.
For homes in an irrevocable trust, things can get more complex. The trust itself may pay the tax if profits are kept within the trust. If proceeds are passed on to beneficiaries, they may owe the tax personally.
If the sale happens after the original owner’s death, the property often gets a step-up in basis. This means the value of the home is adjusted to its fair market value at the time of death, potentially reducing the taxable gain when it is sold. However, this step-up applies only if the property was in a revocable trust. For irrevocable trusts, the original purchase price is typically used to calculate gains, which can result in a larger tax bill.
Other Possible Taxes
Depending on where you live, you may also face inheritance tax, which is paid by the person receiving the property or sale proceeds. A few states still impose this tax, and rates vary widely. There may also be estate taxes if the overall estate exceeds federal or state exemption thresholds.
Charitable & Medicaid Trusts
Some trusts are designed for specific purposes. For example, a qualified personal residence trust allows the original owner to live in the house for a set number of years before transferring it to beneficiaries. When the house is eventually sold, the cost basis is the value when it was placed into the trust and not when it was inherited, which can lead to a higher capital gains tax bill.
A charitable trust can sell real estate without paying capital gains tax, which makes it an attractive option for donors who want to support a cause and avoid taxes.
If the home is in a Medicaid irrevocable trust, selling it typically will not affect the grantor’s Medicaid eligibility, but the trust or the beneficiaries will be responsible for any taxes on the sale.
The Bottom Line
Selling a house in a trust comes with tax rules that you cannot overlook. The type of trust, the timing of the sale and whether proceeds stay in the trust or are distributed to beneficiaries all play a role in determining who pays what.
Before putting the house on the market, it is wise to talk to an estate attorney or tax professional who understands trust sales. They can help you figure out whether you qualify for exclusions, how to minimize capital gains and how to make sure that the sale complies with the trust’s terms.