A trust-held home can be sold before the grantor dies.
But who has the authority to sell it depends on how the trust is structured.
And the type of trust can affect more than just who has control.
Can the grantor make the decision, or does the trustee have control?
Does that change if the home is held in a revocable living trust instead of an irrevocable trust?
Could selling now create different tax consequences than waiting?
This guide explains the differences, the pros and cons of selling, and the tax implications to consider.
Selling a house in a revocable living trust
A revocable living trust gives the grantor the most flexibility while they’re still alive.
In the typical setup, the grantor also serves as trustee and continues to control the trust’s assets.
That allows them to decide when to sell the home without waiting for a beneficiary to approve the decision.
A different arrangement may apply if there are co-trustees or someone else is serving as trustee.
The trust agreement determines who can act and whether another trustee must participate in the decision or sign the sale documents.
Incapacity creates another situation to consider.
In that situation, the trust agreement should be checked for how incapacity is determined and when a successor trustee can take over.
Once that transition happens, the successor trustee manages the property under the terms of the trust.
A power of attorney works differently.
It can authorize someone to handle real estate transactions for the grantor, but it does not automatically make that person trustee or give them authority over property owned by the trust.
Selling a house in an irrevocable trust
An irrevocable trust works differently because the grantor no longer has the same level of control over the property.
The acting trustee is responsible for making decisions about the home and deciding whether to sell it within the authority given by the trust.
But the grantor may still retain certain rights or powers.
Other authority may be given to co-trustees, a trust protector, or another person named in the agreement.
For example, the grantor might retain the right to live in the home even though the trustee controls decisions about the asset.
The exact rights depend on how the trust was written.
Beneficiaries are different.
Having an interest in the trust does not automatically give a beneficiary the right to approve or block the sale.
Their consent is only needed if the trust or applicable law requires their approval.
The trustee also has fiduciary duties to the beneficiaries.
That means they need to act in line with the trust’s purpose and the beneficiaries’ interests rather than their own personal interests.
Restrictions in the trust can make the selling decision more complicated.
The agreement may limit when the property can be sold or require another person’s approval.
It might also leave questions about the trustee’s authority that need to be resolved before the sale can move forward.
A trust or estate attorney can help interpret the agreement if the trustee’s authority is unclear.
Advantages and disadvantages of selling a house in a trust before death
Here are the pros and cons of selling while the grantor is still alive.
Pros
More liquidity: Selling converts the home into cash that can be held or invested according to the trust’s terms. That can also reduce how much of the trust’s value is tied up in one property.
Lower ongoing expenses: Property taxes, insurance, maintenance, repairs, utilities, and HOA fees tied to the home end once it is sold.
Simpler trust administration: Real estate requires ongoing maintenance, insurance, recordkeeping, and sometimes property management. Cash can be easier for the trustee to manage and can simplify future distributions when the trust calls for them.
The grantor may still be involved: Selling while the grantor is alive gives them an opportunity to participate in decisions about the property if the trust gives them that authority or another role.
Avoid leaving the property decision for later: If the house would likely need to be sold eventually, handling the sale now can prevent someone else from having to make that decision later.
Cons
Loss of future appreciation: Once the home is sold, the trust no longer benefits if the property value increases later.
Taxes may be triggered sooner: If the sale produces a taxable gain, capital gains tax may be due in the year of the sale.
Potential loss of a post-death basis adjustment: If the property would qualify for a basis adjustment at the grantor’s death, selling it first means the home will not receive that post-death adjustment.
The proceeds may still be restricted: Selling a house from an irrevocable trust does not automatically make the money available to the grantor or beneficiaries. How the proceeds can be used or distributed still depends on the trust.
Loss of use of the home: If the grantor or another person has the right to live there, selling can affect that arrangement and may require another housing plan, depending on the trust terms.
Tax implications of selling a house in a trust before death
The tax consequences of selling before death depend heavily on how the trust is taxed.
Who pays capital gains tax?
The answer depends on whether the trust is taxed as a grantor or nongrantor trust.
A revocable living trust is a grantor trust for federal income tax purposes.
The grantor is treated as the owner, so taxable gain from the sale is reported on their individual tax return.
An irrevocable trust can work either way.
Some irrevocable trusts are still grantor trusts because the grantor retained certain powers or benefits.
In that situation, the grantor remains responsible for reporting the taxable income.
A nongrantor trust is treated as a separate taxpayer.
The trustee files Form 1041, and the trust may be responsible for the capital gains tax.
Paying the sale proceeds to beneficiaries does not automatically shift the gain to them.
In some situations, beneficiaries can be taxed on capital gain.
But that depends on the trust terms, applicable law, and how the gain is treated for tax purposes.
So the word “irrevocable” by itself does not tell you who pays the tax.
You need to know whether the trust is treated as a grantor or nongrantor trust.
Can the home-sale exclusion apply?
Yes. Holding the home in a trust does not automatically prevent the sale from qualifying for the federal home-sale exclusion.
If the home is held in a grantor trust, the grantor is treated as owning the property for purposes of the exclusion.
That includes a revocable living trust and can also include certain irrevocable trusts.
The grantor still needs to meet the IRS requirements.
The standard rule for the full exclusion is that the grantor must have owned and used the home as their main residence for at least two of the five years before the sale.
If they qualify, up to $250,000 of gain can be excluded from federal income tax.
Certain married couples filing jointly can exclude up to $500,000.
The situation is different with a non-grantor trust because the grantor is not treated as the owner for federal income tax purposes.
You should not assume the home-sale exclusion applies just because the property was the grantor’s residence.
This is another reason the word “irrevocable” does not answer the tax question by itself.
An irrevocable trust can still be a grantor trust.
And that classification can determine whether the grantor is treated as owning the home for the exclusion.
How selling before death can affect the property’s basis
Every property has a tax basis.
The basis is essentially the home’s starting value for tax purposes, adjusted for certain costs and improvements.
If the property is sold while the grantor is alive, the gain is calculated using its adjusted basis at the time of the sale.
Waiting until death can produce a different result.
Property that qualifies for a basis adjustment at death can receive a new basis tied to its fair market value at that time.
If the property has appreciated, that can reduce the taxable gain when it is later sold.
But not every home held in a trust qualifies for that adjustment.
A home in a revocable living trust is generally included in the grantor’s estate and can qualify for a basis adjustment at death.
An irrevocable trust requires a closer look.
For example, assets held in an irrevocable grantor trust do not receive a basis adjustment solely because the grantor dies if those assets are not included in the grantor’s gross estate.
That’s why the potential basis treatment should be reviewed before deciding whether selling now or holding the property is more favorable.
Find an experienced agent to sell your trust-held home
If you decide selling now makes sense, you’ll need an agent who understands trust sales.
Their experience can be the difference between catching a trust-related issue early and having it hold up the sale later.
Our no-cost service can help with that.
We scrutinize agents in your area to help you find a top performer who fits your property and situation.
You can learn more about how our agent matching works to see what happens after you request a match.
