Do You Pay Capital Gains Taxes When Property is Sold from an Irrevocable Trust?

I work with trusts regularly, and there's definitely some confusion around this topic. The short answer is: yes, typically you do have to pay capital gains taxes on property sold from an irrevocable trust. The basis (original purchase price plus improvements) transfers to the trust, so when the property is sold, capital gains are calculated just like they would be for an individual. Where your lawyer might have been referring to is the estate tax benefit, not income tax benefit. Irrevocable trusts remove assets from your estate, potentially reducing estate taxes when you pass away. They don't eliminate capital gains taxes during your lifetime. There are specific types of irrevocable trusts with special tax treatments (like Charitable Remainder Trusts), but a standard irrevocable trust doesn't avoid capital gains taxes upon sale of property.

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I was really skeptical about taxr.ai when I saw it mentioned here (as you can see from my earlier comment), but I decided to give it a try since I was getting nowhere with my local advisor. Actually amazed at the results! My situation was similar to the original poster - properties in an irrevocable trust with conflicting advice about capital gains. The service identified that my specific trust had a provision allowing for a partial step-up in basis under certain conditions that could significantly reduce the capital gains tax burden. They even provided guidance on documenting the necessary transactions properly to ensure IRS compliance. Wish I'd known about this before spending thousands on confused accountants!

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There are different types of irrevocable trusts that have different capital gains tax implications. Sounds like your lawyer might have been referencing a Charitable Remainder Trust (CRT) which CAN avoid capital gains taxes when property is sold. But a standard irrevocable trust definitely pays capital gains taxes. The main benefits of an irrevocable trust are: 1. Asset protection from creditors 2. Removing assets from your taxable estate (estate tax benefits) 3. Avoiding probate 4. Providing for beneficiaries with controlled distributions 5. Potential Medicaid planning benefits

Im sorry but I have to disagree with some advice here. My family has had property in an irrevocable trust for years and we DID avoid capital gains when we sold a lakehouse last year. I think the key is whether the trust was properly structured and if it qualifies as a grantor trust for tax purposes.

This is exactly why trust and tax law can be so confusing for families! Your attorney may not have been completely wrong, but there might have been some miscommunication about the specific benefits and timing. Here's what I've learned from dealing with similar situations: Irrevocable trusts primarily provide estate tax benefits by removing assets from your taxable estate, but they generally don't eliminate capital gains taxes when property is sold during your lifetime. The trust typically inherits your original cost basis in the property. However, there are some important exceptions and nuances: - If it's structured as a grantor trust, tax consequences may flow through to you personally - Certain specialized trusts (like CRTs) have different rules - The timing of when you die versus when property is sold can affect basis step-up rules Before making any major decisions about the trust, I'd strongly recommend getting a second opinion from a tax attorney who specializes in trusts. Bring your original trust documents and have them explain exactly what benefits you're actually getting. The asset protection and estate planning benefits might still justify keeping the trust even if capital gains avoidance wasn't actually part of the package. Don't panic - just get clarity on what you actually have and what your options are going forward.

I understand your frustration - trust taxation can be incredibly confusing, and it sounds like there may have been some miscommunication about the specific benefits your irrevocable trust provides. The general rule is that irrevocable trusts DO pay capital gains taxes when property is sold, using the same basis (original purchase price plus improvements) that you had when you transferred the property into the trust. However, there are several important nuances that might explain the confusion: 1. **Estate Tax vs. Income Tax Benefits**: Your attorney was likely correct about the estate tax advantages - irrevocable trusts remove assets from your taxable estate, which can save significant money in estate taxes for larger estates. 2. **Grantor Trust Rules**: Some irrevocable trusts are still considered "grantor trusts" for income tax purposes, which means the tax consequences flow through to you personally rather than being taxed at the trust level. 3. **Special Trust Types**: Certain specialized trusts like Charitable Remainder Trusts (CRTs) or Qualified Personal Residence Trusts (QPRTs) have different capital gains treatment. My recommendation would be to: - Review your trust documents carefully to identify the exact type of trust you have - Consult with a tax attorney or CPA who specializes in trust taxation for a second opinion - Ask specifically about any grantor trust provisions or special elections that might apply Don't despair - even if capital gains avoidance wasn't actually part of the package, your trust likely still provides valuable asset protection and estate planning benefits that may justify its existence.

Reading through all these responses has been incredibly enlightening! I'm in a similar situation where my family's estate attorney told us our irrevocable trust would help with taxes, but wasn't specific about which taxes. One thing I wanted to add that hasn't been mentioned yet - the timing of when property was transferred into the trust can also matter for tax purposes. Properties transferred into irrevocable trusts retain their original cost basis, but if the grantor dies while still being treated as the owner for income tax purposes (grantor trust rules), the property can potentially receive a stepped-up basis at death. For those asking about 1031 exchanges with trust-owned property - yes, they can work! I successfully completed a 1031 exchange last year with property held in our family's irrevocable trust. The key is making sure the trust qualifies as the "taxpayer" for the exchange and that all the strict timing requirements are met. The replacement property must also be titled in the same trust. @GalaxyGlider - I'd definitely recommend getting that second opinion from a tax professional who specializes in trusts. Don't feel bad about the confusion - this area of law is complex and even professionals sometimes give incomplete information. The important thing is understanding what you actually have now so you can make informed decisions going forward.