Tax Implications of Putting a House in a Trust
Understand the financial trade-offs of placing a home in a trust. The structure you choose directly impacts your estate, your heirs' inheritance, and ongoing tax liabilities.
Placing a home into a trust is a common estate planning strategy to manage property and facilitate its transfer to heirs, potentially avoiding probate. A trust is a legal arrangement where a trustee holds assets for a beneficiary. The tax implications depend entirely on the type of trust established.
The primary factor determining the tax outcome is whether the trust is revocable or irrevocable. This choice affects gift taxes, estate taxes, capital gains, and property taxes, as it dictates who controls the property and how the IRS views the transaction.
Revocable vs. Irrevocable Trusts
A revocable trust, often called a living trust, offers flexibility. The individual who creates the trust, the grantor, retains full control over the assets held within it. The grantor can modify the trust’s terms, change beneficiaries, or dissolve the arrangement at any time.
From a tax perspective, a revocable trust is largely disregarded. The IRS treats the grantor as the direct owner of the house, and the trust itself is not a separate taxable entity. The grantor’s Social Security number is used for tax reporting, and all financial activities are reported on the grantor’s personal income tax return.
An irrevocable trust operates as a separate legal and tax entity. When a grantor transfers a house into an irrevocable trust, they permanently relinquish control and ownership of the property. The terms of the trust are fixed and cannot be easily altered or revoked.
Because the grantor no longer owns the asset, the trust itself becomes a taxpayer with its own tax identification number. The trustees are responsible for managing the property and filing tax returns for the trust. This separation creates potential tax planning opportunities at the cost of losing control over the asset.
Gift and Estate Tax Consequences
For a revocable trust, transferring a house is not considered a completed gift by the IRS because the grantor can take the property back. Therefore, no gift tax is due, and a gift tax return is not required.
The full market value of a house in a revocable trust is included in the grantor’s gross estate for federal estate tax purposes. The assets are subject to estate tax if the total estate value exceeds the federal exemption, which is $13.99 million per individual for 2025. This exemption is scheduled to be reduced by about half at the end of 2025 if the current law is not extended.
Transferring a house to an irrevocable trust is a completed gift, which triggers gift tax rules. The grantor must file a federal gift tax return to report the transfer. While a tax may be due, most people use a portion of their lifetime gift and estate tax exemption instead of paying an out-of-pocket tax.
The primary benefit of this strategy is that the house, and any future appreciation in its value, is removed from the grantor’s taxable estate. This can result in estate tax savings for individuals with assets exceeding the exemption amount.
Impact on Capital Gains Tax
Placing a house in a trust affects capital gains tax, which is levied on the profit from the sale of an asset. The property’s cost basis—its original purchase price plus capital improvements—is used to calculate the taxable gain when the house is sold.
A house in a revocable trust passes to beneficiaries with a “step-up in basis” upon the grantor’s death. The cost basis is adjusted to the home’s fair market value at the date of death. For example, if a home purchased for $100,000 is worth $1 million upon death, the beneficiary’s new basis is $1 million, allowing them to sell it for that price with no capital gains tax.
Transferring a house to a standard irrevocable trust results in a “carryover basis.” The trust and its beneficiaries take on the grantor’s original cost basis. If that same $100,000 home is sold years later for $1 million, the trust or beneficiaries would face capital gains tax on the $900,000 profit.
The primary residence exclusion allows an individual to exclude up to $250,000 ($500,000 for a married couple) of capital gains from their home’s sale. This benefit can be preserved when the house is in a revocable trust. It can also be maintained in certain irrevocable “grantor trusts,” where the grantor is treated as the owner for income tax purposes, but may be lost in other irrevocable trust structures.
Annual Property and Income Tax Concerns
A common concern is whether transferring a house to a trust will trigger a property tax reassessment. Most local tax authorities provide exemptions that prevent reassessment when a property is moved into a revocable trust, as the effective ownership has not changed.
Exemptions may also apply to certain irrevocable trusts, particularly those for the grantor’s immediate family. These rules are highly localized and depend on county and municipal regulations. You should verify the specific rules with the local assessor’s office before any transfer.
The ability to deduct mortgage interest and property taxes is also a consideration. For a revocable trust, the grantor continues to be treated as the owner and reports all income and deductions on their personal Form 1040. This treatment also applies to irrevocable trusts structured as “grantor trusts” for income tax purposes.
If an irrevocable trust is a separate tax-paying entity (a non-grantor trust), the trust is responsible for paying taxes on any income the property generates. The ability to pass deductions to a beneficiary depends on the trust’s specific terms and tax law. This can limit the tax benefits previously enjoyed by the homeowner.