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Tax.appeal.168
Tax.appeal.168, Tax Accountant
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Is a trust eligible for the exclusion of gain on the sale of

Customer Question

Is a trust eligible for the exclusion of gain on the sale of a principal residence?

Facts: Taxpayer died in 2007. Residence was an asset of her grantor trust at the date of death. The trust provided for the surviving spouse's life interest in the residence. Surviving spouse continued to live there until 2012 at which time he decided to relocate. The trust then sold the residence.

Please provide authority for claiming the exclusion if it applies.
Submitted: 1 year ago.
Category: Tax
Expert:  Tax.appeal.168 replied 1 year ago.

Welcome. THANK YOU for choosing Just Answer. My name is XXXXX XXXXX my goal is to help make YOUR life, a little...LESS taxing.

 

 

 

REVISION:

 

 

The trust itself is not eligible for the exclusion, however, since the property was in the trust at the time of death, and the decedent owned the trust, the current owner of the trust at the time of the home sale may be eligible for the exclusion, assuming that the house was owned by the trust when sold. SEE BELOW:

 

------------------------------------

 

(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.

 

REFERENCE SOURCE:

 

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

 

Reference to IRC Section 671-679 can be found at the following link: http://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-J/part-I/subpart-E

 

Please let me know if I can be of further assistance to you regarding this matter. Thank you again for using JUST ANSWER.

Customer: replied 1 year ago.

And under my facts does the surviving spouse qualify as the owner of the residence?

Expert:  Tax.appeal.168 replied 1 year ago.
Hello again Pat,

YOU WROTE:

"The trust provided for the surviving spouse's life interest in the residence. "

A person's life interest in a property does not qualify them to be the owner of the property, however, it does qualify them to qualify for the home sale exclusion exemption. SEE BELOW:

-------------------------------


(e) to be able to receive some of the sales proceeds if the property is sold during the life tenant’s lifetime (and to qualify for the exemption under federal law to exclude up to $250,000 of gain) – this can be a detriment if the home is sold and the grantor later
enters a nursing home and goes on Medicaid.

REFERENCE SOURCE:

http://www.tpclaw.com/images/Life_Estate_Interests_Handout.pdf

Page 2.
Customer: replied 1 year ago.

Sorry, but I'm not following your reply. How does the life tenant get the exclusion if the trust sells the property? Isn't it the trust that needs to report the sale and the gain?

Expert:  Tax.appeal.168 replied 1 year ago.

Hello again Pat,

 

As I mentioned in my REVISED first response, the trust itself is not eligible for the exclusion, but since the spouse was granted a life interest in the property, he is eligible to take the exclusion as outlined in my response prior to this one.

 

------------------------------------------

 

Following is what I wrote in my first response:

 

(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.

 

REFERENCE SOURCE:

 

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

 

Reference to IRC Section 671-679 can be found at the following link:

 

http://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-J/part-I/subpart-E

 

As this is a Grantors Trust, the sale of the property is reported by the applicable individual on their tax return, not by the trust. SEE BELOW:

 

There are two exceptions to the general rule. First, if the grantor has retained an interest in the trust (e.g., right of revocation) or if some other person is given a general power of appointment over the trust income or principal, trust income is taxable to the grantor or powerholder. These are known as grantor−type trusts−−an example is the revocable trust where all income is taxed to the grantor.
Second, if the trust is a charitable remainder trust because the charity is tax exempt, retained trust income is generally not taxable to the trust, but any distributions are taxed to the beneficiaries.

 

REFERENCE SOURCE:

 

http://www.heritagewealthmgrs.com/wp/Income%20Taxation%20of%20Trusts%20&%20Estates.pdf

 

Page 2

Tax.appeal.168, Tax Accountant
Category: Tax
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Experience: Nearly 30 years of varied tax industry exp. Tax Biz owner
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Expert:  Tax.appeal.168 replied 1 year ago.
Pat,

Thank you for the positive rating, I edited my last response to include some additional information to help clarify the information relating Grantor Trusts.

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