Question

Sale of an inherited primary residence by an irrevocable trust

Forum|Forum|1 year ago
June 30, 2024
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I am using TT to do my brother's irrevocable Trust (formed at my parents' death) and his personal tax return. From what I can tell, an heir can get the $250/$500k exclusion for a primary residence if they lived in the house for two of the last five years. The Trust owns and will sell the house in 2024. My brother (an adult) is the trust beneficiary and has lived in the house for the required years. House has appreciated since parents' death so there will be a gain on sale (above stepped-up inheritance basis). Will the trust be issued a 1099-S or my brother? Does the trust report the gain on home sale on the K-1 and my brother then report on his individual tax return with the exemption? If the trust has been distributing capital gains, does it need to distribute the capital gains on the sale of the house to my brother? If so, how does that work in TT? I don't see anything on the K-1 other than a regular capital gains tax. Or do I have the taxes completely wrong on this, and somehow my brother does not get the primary residence exception even though he has lived there for 20+ years since it is owned by his irrevocable trust (I hope not)?

TurboTax Home & Biz Windows

P

pk12_2

Employee

@JFW3 , please can you clarify somethings :

(a) Are you saying that the revocable trust of your parents became irrevocable on the passing of your parents OR that your parents set up an irrevocable trust with assets ( house ) and the only beneficiary is your brother ?

(b) if the latter, and the house has been your brother's abode for all these years -- the irrevocable trust acting as a conservatorship for the benefit of your brother -- and trust has and still owns the house -- true ?

(c) what I am trying to get to is that if the trust owns the house and sells it -- there is no step-up and/or " main residence" gain exclusion --- therefore the questions to understand the situation.

J

JFW3Author

Champ, Thanks for the interest and questions. My mother had a revocable trust, which owned my folks' home after my father passed. The house was transferred to a new (irrevocable) trust in my brother's name upon my mother's death. My brother is the only beneficiary of that Trust. It's not a conservatorship. My brother lived with my parents in the house when they were alive and continued to live in the house after they died. His trust (created when my Mom died) currently owns the house. I found an article online that indicates, "Section 121(d)(9)(C) stipulates that the (residency) exclusion also applies if a trust sells a property where the grantor or the heir uses the home as a primary residence." So say my folks paid $200k for the house; it was worth $275k when my mother passed, and it is now worth $300k. I believe my brother's basis is $275k, and he should get a residency exclusion for a $25k gain if sold at $300k. I was just trying to see if someone in the TT community had experience with this as I'm sure it's not unique.

M-MTax

Your brother's basis would be $275k and he would get the exclusion provided the trust was a grantor trust.....there is a specific exception for trusts in Reg Sec 1.121-1