By: Martin M. Shenkman, CPA, MBA, JD
An estate or trust may qualify to exclude the gain realized on the sale of the decedent client’s personal residence. The client’s estate could qualify for this benefit, an heir who inherited the property from the deceased client (e.g., a child) could qualify, and a special trust referred to as a Qualified Revocable Trust (“QRT”) can qualify. The QRT is explained more fully below. If the carryover basis rules that accompany estate tax repeal in 2010 become law, consideration to how to handle planning for a home will take on additional importance and complexity. When an executor considers which assets should receive an allocation of the $1.3 million general, and the $3 million spousal, basis adjustments following estate tax repeal in 2010 (if these rules ever come into effect) 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 post-2009 laws to $4,550,000 ($1.3 million general basis step up + $3 million spousal basis step up + $250,000 home sale exclusion) if a sale takes place after the death of the first spouse. Most practitioners, however, believe it unlikely that carryover basis will ever in fact become law. A QRT is a trust that is a grantor trust, which is treated as owned by the client. The income earned by a grantor trust is taxable to the grantor (i.e., the person who created the trust) during his lifetime. The common QRT is the popular revocable living trust. The client’s heirs (e.g. his children) inheriting his home can count the time periods for which the client owned the house, or used it as his residence, in determining if the heirs qualify for the home sale exclusion. Specifically, a home has to be used, as explained above, for two of the five years before sale, as a principal residence. The client’s use and ownership can be combined (tacked) with that of his heir.
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