How are capital gains taxes calculated for home sale from a revocable living trust?

Good news! If the original trustee has lived in the home as their primary residence for at least 2 out of the last 5 years, they'll likely qualify for the Section 121 exclusion. This means the first $250,000 of gain would be tax-free for a single person (or $500,000 if the trustee is married filing jointly). For a revocable living trust, the IRS generally treats it as a "disregarded entity" for tax purposes. This means the trustee who lived in the home would report the gain on their personal tax return (Form 1040, Schedule D), not on a separate trust tax return. The fact that new trustees were added recently shouldn't affect this treatment as long as the trust remained revocable and the ownership structure didn't fundamentally change.

After spending weeks trying to untangle my parents' trust tax situation with their home sale, I found this amazing tool called taxr.ai (https://taxr.ai) that totally saved me. It has this cool feature where you can upload trust documents and it breaks down the tax implications in plain English. I was in a similar situation with new trustees being added and confusion about who owed what. The analysis showed us exactly how the Section 121 exclusion applied and identified a partial rental history we'd forgotten about that affected part of the calculation. Definitely worth checking out before you file.

Update: I finally got around to trying taxr.ai and I'm honestly shocked at how helpful it was. My situation with multiple trustees and partial rental use was WAY more complicated than I thought. The tool identified an issue with how our trust was structured that would have caused us to lose the full capital gains exclusion. Fixed the problem with our attorney before selling, and now most of our gain is tax-free! Literally saved tens of thousands in taxes. The breakdown of which parts of the gain were taxable vs excluded was super clear, and they even explained which forms we'll need to file. Wish I'd found this months ago!

For anyone dealing with trustee/IRS issues, I had a similar nightmare trying to get answers from the IRS about our trust sale. Kept getting different answers from every agent I talked to, when I could even get through (spent literal DAYS on hold). Finally used Claimyr (https://claimyr.com) after seeing it mentioned here, and they got me connected to an actual IRS trust specialist in about 10 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent confirmed that as long as the trust was revocable and the owner lived there 2 of last 5 years, they get the full capital gains exclusion. Said our accountant had overcomplicated things and was treating it like an irrevocable trust unnecessarily.

Ok I need to eat my words. After waiting on hold with the IRS for 4+ hours yesterday trying to get my trust question answered, I broke down and tried Claimyr. Got connected to an actual IRS agent in about 15 minutes. The agent confirmed everything about my situation and walked me through exactly how to report the capital gains from our trust property sale. Turns out I was making it WAY more complicated than it needed to be. Because it's a grantor trust, it all just goes on my personal return and the $250k exclusion applies normally. Honestly can't believe how easy it was after weeks of frustration. Definitely using this for all my IRS calls from now on.

One thing nobody's mentioned - make sure you've documented all capital improvements made to the property while in the trust. Those increase your basis and reduce your taxable gain. We just went through this with my mom's house in her trust, and we were able to add about $85k to the basis from documented improvements (new roof, kitchen remodel, etc.) over the 15 years she owned it. Saved a bundle on taxes!

Has anyone had issues with property tax reassessment when adding new trustees to an existing trust? Our county tried to claim it triggered a property tax reassessment when we updated our trust and added my sister as co-trustee.

Just wanted to add something that saved us a lot of headaches - make sure you understand the timing rules for the Section 121 exclusion with trusts. The "2 out of 5 years" primary residence test has to be met by the person who actually lived in the home, not just any trustee. In your case, since the original trustee lived there the entire 13 years, you're golden. But we almost made a mistake thinking that because my dad was added as a trustee 3 years ago, his residency timeline mattered too. It doesn't - only the person who actually used it as their primary residence. Also, keep detailed records of when the trust was updated and when new trustees were added. The IRS may want to see that the beneficial ownership didn't change, just the management structure. Since it remained revocable throughout, you should be fine, but documentation helps if questions come up later. One last tip: if you're expecting $450k in gains, even with the exclusion you might have some taxable portion depending on your filing status. Consider whether it makes sense to spread the sale across tax years or if there are any timing strategies that could help minimize the tax hit.