How to Report TRUST Home Sale Exclusion

[swongtax]

Hello All,

My client, who is both the Trustee and a Beneficiary (1 of 3 beneficiaries) of a House owned by a Revocable Trust that became an Irrevocable Trust upon the passing of the Grantor, sold a house in 2021.

Does the sale of the home owned by this Irrevocable Trust qualify for the Home sale gain exclusion of $250,000, according to the following explanation?  And if so, who reports the Sale of the House, the Taxpayer on his individual Income tax return or the Trust?  Form 1099-S for the sale was issued to the Trust with the Trust Tax ID, so I thought it would be reasonable to report it under the Trust.

Thank you!

SW

https://www.law.cornell.edu/cfr/text/26/1.121-1

3) Ownership -

(i) Trusts. If a residence is owned by a trust, for the period that a taxpayer is treated under sections 671 through 679 (relating to the treatment of grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the trust will be treated as if made by the taxpayer.

[swongtax]

I forgot to mention that the clause I copied from Cornell Law does not specify if it is referring to a Revocable (Grantor) Trust or Irrevocable Trust.  If seems to be referring to a Revocable (Grantor) trust due to the last sentence ( and the sale or exchange by the trust will be treated as if made by the taxpayer.)

[TaxGuyBill · Accepted solution]

If I remember correctly, "sections 671 through 679... as the owner of the trust" means only revocable trusts.   So no exclusion.

But don't forget about the step-up in Basis on the date of death.

Yes, the Trust sold the property so it is reported on the Trust return.

[jeffmcpa2010]

as Bill mentions, you probably don't need the exclusion, as there likely was a Step Up Basis to Fair market value as of the date of death. Any increase between date of death and the sale is likely taxable, (at least that has been my experience)

[qbteachmt]

"for the Home sale gain exclusion of $250,000"

Are you referring to the exclusion for those who owned and lived in the house? I don't see where you mention who was living in the house for how long.

[swongtax]

Yes, this assumes that the Trustee and beneficiaries have all lived and owned the home within the last 2 out of 5 years prior to the sale.

Unfortunately, it appears that because this is an IRREVOCABLE Trust, it is a separate entity, and the sale happened IN 2021, more than 8 years after the date of death, the Step-up-in-Basis helps, but will not eliminate the capital gain on sale of the home.

THANK YOU to EVERYONE for you quick and wise responses!

SW

[BobKamman]

I was going to suggest that you not hurt yourself jumping to conclusions -- for example, that the sale happened soon after death.  Then I saw the later comment that explained there was an eight-year delay.  Was it a rental property during that time?  Don't forget to adjust for depreciation.