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Recently I received a telephone call from a client looking to sell their home.  The home had been transferred to a trust years earlier and they wanted to know if they would qualify for the $250,000 (per resident owner) capital gains exclusion on the sale of their home.

Generally speaking, the Internal Revenue Code provides, with certain limitations and exceptions, that gross income does not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, the taxpayer has owned and used the property as the taxpayer’s principal residence for periods aggregating 2 years or more.  An individual taxpayer may exclude up to $250,000, and certain taxpayers who file a joint return may exclude up to $500,000 of gain from the sale or exchange of such property.

In fact, a couple may exclude up to $500,000 of gain on a joint tax return even if only one spouse satisfies the ownership requirements, however, both spouses must satisfy the use test.

In determining use, the IRS looks to:

  1. Was this their primary residence?
  2. Did they have beneficial enjoyment of the corpus of the trust?
  3. Do they have the exclusive use, possession and occupancy of the residence?
  4. Is the income subject to a power of disposition, exercisable by the creator of the trust without approval or consent by another party?

After doing a detailed assessment of the trust in relation to the prongs that the IRS requires for the exclusions, we were able to appeal to the IRS.  We amended the tax returns for this client and received a full refund of the tax on the capital gains that their accountant had them pay at the time of the sale.

Comments (2)

  1. Thank you for the article, and congrats on successful appeal.

    I am wondering if a property is held in a trust, whose beneficiaries are children under 18, and it gets sold, do the underage beneficiaries qualify for 250K exemption. Assume that the children reside in the property and pass the length of residency tests. Also, if this situation qualifies for an exemption, would the exemption be per child? per trust? Thank you, regards.

    1. Thank you for your email. Your matter should be addressed by legal counsel and we are available to assist you. Please contact me at (516) 683-1717 or via email at [email protected] and I will arrange for a meeting with one of our experienced attorneys. I will also address any questions that you may have regarding our legal services. I look forward to hearing from you.
      Please Note: This reply is informational only and not legal advice. You should seek the services of an attorney for legal advice.

      Sincerely yours,
      Janet Corsetti, Client Service Coordinator

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