Capital gains tax basis for house in irrevocable trust - stepped up basis questions

Thanks for the explanation. I thought IDGTs were primarily used to freeze estate values - so why would the assets still be included in the estate? Isn't that defeating the purpose of the trust? Also, is there anything specific in the tax code that confirms the stepped-up basis in this situation?

You're right that IDGTs are often used for estate freezing techniques, but they can be structured in different ways. In this case, the trust was set up so the father retained a life estate in the home, which is why it would still be included in the estate. Under IRC Section 2036, if you retain the right to use or live in a property for life, that property is pulled back into your estate for estate tax purposes. The stepped-up basis comes from IRC Section 1014, which provides that the basis of property included in a decedent's estate receives a stepped-up basis to fair market value at death. Since this property will be included in the estate due to the retained life estate, it qualifies for the step-up.

How does taxr.ai actually work? Do you just upload the trust documents and it gives you answers? I'm skeptical about AI giving accurate advice on something as complex as irrevocable trusts.

Does it also tell you what documents you need to keep or if you need to get an appraisal? My parents did something similar but I'm not sure if we should be documenting the current value.

You upload your documents and their AI analyzes the specific language, then provides a detailed report with citations to relevant tax code. It's not just generic advice - it finds the specific provisions in your trust that impact tax treatment. It's backed by tax attorneys who review edge cases. For documentation requirements, yes - the report includes a checklist of what you need to maintain. In my case, it recommended getting a professional appraisal to establish current value but explained exactly why that was necessary based on our trust's specific provisions.

How does this actually work? I'm confused why the IRS would talk to someone else about your tax situation. Don't they need to verify your identity?

Sounds like a scam to me. Why would I pay for something I can do myself for free? The IRS eventually answers if you're persistent enough.

They don't talk to someone else about your situation. The service just holds your place in line and calls you when it's your turn. You're the one who speaks directly with the IRS agent, and yes, you verify your identity yourself. The service just saves you from having to physically wait on hold for hours. When the IRS agent picks up, your phone rings and you're connected directly to them. I was skeptical too until I tried it and got through in my first attempt after weeks of failed calls.

I've double checked and it's definitely structured as an IDGT, not a QPRT. The documentation explicitly uses the term "intentionally defective grantor trust" and has the typical IDGT provisions. Does that change your thoughts on the tax treatment?

If it's explicitly an IDGT with the grantor retaining a life estate, then the previous advice is correct. The house should get a stepped-up basis upon your father's death since it will be included in his estate under Section 2036 (retained interests). The basis will be the fair market value at date of death. Keep in mind though that while this provides a tax advantage for capital gains purposes, the value of the house will count toward your father's estate tax exemption amount. Depending on the total value of his estate, this could potentially trigger estate taxes if he's over the exemption threshold.

Yes, an IDGT can do a 1031 exchange since it's treated as a grantor trust for income tax purposes. The grantor is considered the owner for tax purposes, so as long as the new property is also investment property, it should qualify. But the replacement property would also need to be held in the trust under the same terms.