Trust Home Sale

[Keith T]

A Irrevocable Trust has been set up and the home was deeded in the name of the trust. The member sold the home and moved and purchased another home. The new home purchase is also deeded in the name of the trust. Given the seller of the property met all the eligibility requirements, is this home sale (in the name of a trust) eligible for the Exclusion of Gain?

[Burke]

When an asset is deeded to an irrevocable trust, that generally means the grantor/buyer gives up all ownership rights of the property, as now the trust owns it. The trust cannot be revoked by the grantor. A trust cannot take a 121 exclusion. Question arises, if the grantor lived in the home, where were the mortgage interest and taxes deducted, etc? And what was done with the other expenses of the home?

[Roland Slugg]

Given the seller of the property met all the eligibility requirements, is this home sale (in the name of a trust) eligible for the Exclusion of Gain?

It might. If the trust had been a grantor trust ... a disregarded entity ... it certainly would. However, for the purpose of applying Code §121 certain other trusts also qualify. Regs §1.121-1(c)(3)(i) says the following:

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.

Emphasis added.

Many people have the belief than an "irrevocable" trust can not, well, be revoked by anyone, and this is not true. Some trusts can, indeed, be revoked by the original grantor or by some other person or entity who has been given that authority. If your client held that power, then the trust qualifies for the exclusion. If would also qualify for the exclusion if your client held certain other powers, including the power to direct the use of trust assets (or to direct the person who does have that power), as well as others.

I urge you to read the Regs quoted above and discuss with your client the nature of the trust and his powers with respect to it.

[Burke]

Many people have the belief than an "irrevocable" trust can not, well, be revoked by anyone, and this is not true. Some trusts can, indeed, be revoked by the original grantor or by some other person or entity who has been given that authority.
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Then in such a case, I hold that it cannot be stated that it is an Irrevocable Trust, which by its definition, cannot be revoked -- except by the courts in certain situations.