Edward Asked:
Can a TRUST claim a deduction of $250,000 of capital gains from the sale of the principal residence? The trust is a Special Need Trust. The home is the principle residence of the beneficiary since 1964.
The Principal Residence Exclusion, or Section 121 Exclusion, allows an individual to shield up to $250,000 of primary residence. Since a Trust is not a natural person, they are generally not allowed to use this exclusion. There are exceptions to this exception, however.
The Trust Might Qualify for the Exclusion
Broadly speaking, if the IRS considers the trust beneficiary and the trust to be the same person, and the beneficiary is the person living in the residence, then it is possible to exclude the $250,000 from capital gains. While it is possible a Special Needs Trust was set up in a manner to qualify for the exclusion, you will need an estate attorney or CPA to review the trust documents and tell you how your particular trust is set up.
Distributing the Profits to the Beneficiary
If the trust doesn’t qualify for the exclusion, you should consult a financial planner or CPA familiar with special needs planning regarding the benefits, costs, and risks associated with distributing the money to the beneficiary to avoid having the trust pay the taxes. Trusts have significantly higher taxation than individuals, and you will want to know your alternatives for dealing with this issue. Getting advice is especially important because distributing the profits may not be allowed under the trust, could put government aid at risk, and may have many other potential negative consequences.
Get Professional Help
This is not something you want to try and figure out on your own, as the chances for error are significant. Even most attorneys don’t understand trust law, and it is a specialty field that requires significant education and experience. The above is based on knowing very little about the situation and provides only general education; it is not tax advice nor legal advice for your personal situation. At the very least you should consult your CPA; and you should consider consulting an estate attorney and a fee-only and fiduciary financial planner.
Reference: Treasury Regulation § 1.121-1(c)(3)(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.
Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. He is also the owner of Purposeful Strategic Partners, a fiduciary and fee-only financial planning firm and a Registered Investment Advisor. He can be reached for comment at info@purposefulfinance.org