Sale of Grantor Residence Trust

[Gerhard65]

My client died in 2022 and her primary residence was put into a Grantor Residence Trust in 2016.  The client was entitled to stay in the home providing payment of real estate taxes, home maintenance, etc.  The home was sold in 2023.  No step up in basis is available to the Trust.  Is the Trust entitled to the primary residence $250,000 home exclusion or is subject to capital gain treatment only?

[IRonMaN]

To qualify for the exclusion, it must have been a primary residence for at least 2 out of 5 years.  Since trusts aren’t living, they don’t have primary residences.

I’m not familiar with a grantor residence trust.  If it is an irrevocable trust instead of revocable, your client is screwed.

[George4Tacks]

@BobKamman hates trusts so he might know.

I did find this https://www.ezelderlaw.com/trust-tax-rules-grantor-trusts/#:~:text=One%20reason%20why%20Trusts%20are....

[BobKamman]

@George4Tacks I don't hate trusts, some of my best clients have paid me to prepare a trust for them when it's appropriate, although more of them have paid me to amend them to get rid of all the cookie-cutter dreck, or to revoke them.  I just feel sorry for the people who are conned into buying them from promoters who operate with the knowledge that fools and their money are soon parted.  

In this case, I have no idea what a "personal residence trust" means, but when the poster states "No step up in basis is available to the Trust," that's probably an indication that it was irrevocable.  Maybe there was some provision meant to preserve the exclusion. 

"90% of the people with living trusts don't need one, and 90% of the people who need one don't have one.  Likewise, 90% of the people who buy annuities shouldn't, and 90% of the people who should buy an annuity, don't."

[sjrcpa]

I don't know what a Grantor Residence trust is either.

Regardless of the name, the trust document will explain what it is.

If you are sure step up doesn't apply, there is a taxable gain.

[qbteachmt]

Are you sure of those facts?

So many of these property trusts are unfunded, meaning, no one retitles any property. I bring this up because I was helping on an issue where I was told for years the title was not changed to the trust. When there was a need to sell the home, we interviewed a few real estate agents. One brought the best comp package, including due diligence on building permits for the property and lo and behold, the trust was the titled owner. More often than not, it's the opposite.

And I don't know what State this is in, have you confirmed there is not a Transfer on Death deed on file?

[Gerhard65]

It is a New Jersey property, and the asset was her primary residence and transferred into the trust by deed in 2016.  It is an irrevocable Grantor Trust (IRC 671-677) and the Grantor retains the right to the taxable gain exclusion pursuant to IRC 121(a), 121(d)(8)(a) and 121(d)(T) A&B. 

[BobKamman · Accepted solution]

"121(d)(T) A&B"

No such animal. 

121(d)(8) does deal with sales of remainder interests.  But wouldn't that require the grantor to still be alive?  

[poolcleaner]

Is it a Qualified Personal Residence Trust? 

[Gerhard65]

Thank you, what I thought, but need to confirm.

[sjrcpa]

"the Grantor retains the right to the taxable gain exclusion pursuant to IRC 121"

That's how it would work in a typical Grantor Trust if trust property is sold while Grantor is alive.

But Grantor is dead, and property is sold after death. 

Which of Sections 671-677 made it a Grantor Trust?

Sounds like this could be an Intentionally Defective Grantor Trust.