Can I Get the Capital Gains Benefit if I Buy My House from my Trust?

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Utilizing a QPRT for Capital Gains Benefit

A qualified personal residence trust (QPRT) is a specific type of irrevocable trust that allows its creator to remove a personal home from their estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary.

QPRT may allow for the sale of the residence during its term. In addition, the trustee of the QPRT may hold the sales proceeds as long as the proceeds are held in a separate account. However, the residence may not be sold to the grantor, the grantor’s spouse, or any entity controlled by the grantor or the grantor’s spouse. Properly drafted QPRTs specifically prohibit the sale of the personal residence back to the grantor. The law specifically is intended to prevent you from buying the house back from the trust after it ends, owning it until death, and passing it to your children at the date-of-death income tax basis (thereby reducing the potential capital gains).

Because of this rule, it is important to compare the potential estate tax savings of the QPRT with the increased capital gains benefit or tax potential, assuming the remainder beneficiaries of the residence will sell the house.

Who Pays the Real Estate Taxes and Maintenance Expenses? Is there a Capital Gains benefit?

The grantor pays for all repairs to the house, utilities, lawn care and other basic maintenance, homeowner’s insurance premiums, and real estate taxes. Such payments are for the benefit of you, the grantor, as the tenant during the trust term, and do not constitute taxable gifts.

As a “grantor trust,” you are treated as the owner of the property for federal income tax purposes. Therefore, all income, deductions, and credits associated with the property pass through the trust to you. For the same reason, if your primary residence is the property of a QPRT, then you will qualify for the $250,000 ($500,000 for married couples) capital gain exclusion.

How Many QPRTs Can I Set Up?

Each person can set up no more than two QPRTs: one for the primary residence and one for a vacation home or condominium.

If you have a concern about your legal rights, remedies, and obligations contact our experienced lawyers of the Law Office of Anthony J. Madonia & Associates, Ltd.