A living trust lets property owners put assets in a trust for loved ones after death. The biggest benefit of a living trust is that the owners can continue to use those assets while alive, while also making sure they’re set aside for children, spouses or other beneficiaries if something should happen. If you’re interested in selling property in a living trust that you’ve inherited, you’ll probably wonder whether you’ll have to pay a portion of it at tax time. The answer depends on when the property was sold.
Trust Capital Gains Tax Rate
There are two types of trusts, each with its own unique tax rules. If your loved one transferred his home and other assets into an irrevocable trust, that meant he couldn’t change the terms of that trust, making it “not revocable.” An irrevocable trust provides substantial tax savings after death because the assets in it aren’t subject to tax. However, when alive, the person transferring the assets to the trust may be responsible for paying gift tax.
A revocable trust, on the other hand, can be updated or revoked at any time. After death, that trust becomes a taxable entity of its own, with the estate manager responsible for filing tax forms on it each year until it is fully distributed. Tax on the assets in a revocable trust will be taken out by the trust itself, but taxes only apply to income earned by the assets in the time they remained in the trust. However, if the home transfers to a survivor, selling property in a living trust may be subject to capital gains tax if it is sold at a gain.
If you inherit a home from a living trust, you may be eligible for a capital gains tax exclusion on the trust capital gains tax rate. You’ll need to move in, though. If you own and live in the home for at least two of the five years prior to putting it up for sale, selling property in a living trust could be eligible for the same exclusion regular property owners claim on their primary residences.
Exceptions for Immediate Sales
If you’re selling a home owned by a living trust and the home is sold immediately after death, the home gets a step-up in basis. That means whatever the home sells for is assumed to be its value and no capital gains taxes are applied. This is true even if the estate becomes irrevocable after the owner’s death. Only by holding on to the property for a time after the owner’s death will it begin to accrue value and then be subject to capital gains tax.
2018 Capital Gains Tax Rates
If you’re selling a home owned by a living trust and you find that you owe capital gains tax, you’ll need to pay close attention to the tax brackets for 2018 because they’ve changed. If you’re selling property in a living trust, how they’re taxed depends on how long you’ve held the assets before selling them. Short-term capital gains, taxed on profits on something you’ve had for one year or less, are based on your normal ordinary income tax bracket. If you held the asset more than one year before selling it, you’ll be taxed based on long-term capital gains tax rates, which are 0, 15 or 20 percent depending on your taxable income and filing status.
2017 Capital Gains Tax Rates
If you’re selling a home owned by a living trust on your 2017 taxes, you’ll pay the trust capital gains tax rate for that year if you held it for one year or less. Short-term capital gains are based on your income tax brackets for that year, which may be slightly higher than you’ll pay in 2017.
- Helsell Fetterman: Irrevocable Trusts
- FedWeek: Revocable vs. Irrevocable Trusts
- Elder Law Firm: Who Pays Income Taxes on a Revocable Living Trust?
- The Motley Fool: Capital Gains Tax on a House Sold From a Trust
- NerdWallet: 2018 Capital Gains Tax Rates — and How to Avoid a Big Bill
- The Motley Fool: The Capital Gains Tax Rate: What You Need to Know for 2017
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.