The Listen to Lawrence Letter: Are we responsible to pay capital gains when we sell a home in an irrevocable trust?

November 17, 2022
November 1, 2022 • Volume 3 Issue 86
Here is another question about a home in an irrevocable Medicaid trust.

CLIENT QUESTION:

I would like to know if we are responsible to pay capital gains taxes when we sell our home in our irrevocable trust.

MY RESPONSE:

Whether you sell your house, or your trustee sells your house inside one of my Medicaid trusts, you are personally responsible for the capital gains tax. However, in both situations (because of the way we draft these trusts), you retain your use of your $250,000 per person, capital gain exclusion, usually eliminating most if not all of that tax.

How do we do this when the trust owns the house? We draft the trust to be a grantor trust. That is, the trust has certain language in it that triggers a tax law that treats you, not the trust, as the owner of the house for income tax purposes only. If you are considered the owner, then you keep your exemption.

 

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