Personal Residence Interplay of Home Sale Exclusion and Carryover Basis Rules
An estate or trust may qualify to exclude the gain realized on the sale of the decedent's personal residence. The estate could qualify for this benefit, an heir who inherited the property could qualify, and a special trust, referred to as a Qualified Revocable Trust (QRT), can qualify. The QRT is explained more fully later.
Example: The decedent purchased a home for $100,000 and lived in it until death when the home was worth $500,000, reflecting appreciation of $400,000. Assume that the executor did not elect to allocate any of the $1.3 million/$3 million spousal basis adjustments to the home. The estate sold the home after death for $500,000. The executor could use the $250,000 home sale exclusion to eliminate $250,000 of the $400,000 capital gain.
When an executor considers which assets should receive an allocation of the $1.3 million/$3 million spousal basis adjustments, consideration should be given to maximizing the use of the home sale exclusion available to estates. This can increase the maximum capital gains that can be avoided under the 2010 carryover basis regime to $4,550,000 ($1.3 million general basis step up +$3 million spousal basis step up +$250,000 home sale exclusion). This is not the value of assets that can be increased, but rather appreciation.
A Qualified Revocable Trust (“QRT”) (not the same as a QPRT, or Qualified Personal Residence Trust) has special significance under the carryover basis regime. A QRT is a grantor trust that is treated as owned by the taxpayer/grantor. The income earned by a grantor trust is taxable to the grantor during the grantor’s lifetime. The common revocable living trust qualifies as a QRT. A trust will not qualify as a QRT if it is a foreign trust. If the taxpayer could only exercise power over the trust with the consent of another person, the trust will not qualify as a QRT (IRC Sec. 684).
The heir can count his use of the property and the decedent's ownership. Thus, if the decedent owned the house, but the heir used it, the exclusion may be available. Under pre-2010 law, a surviving spouse can add the deceased spouse's use and ownership to determine if the exclusion is available. Thus, the post-2009 modified carryover basis law appears to extend this benefit.
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