How to avoid capital gains tax on home sale from grandparents' trust?

Thanks for the response. I'm not sure when exactly the trust was created, but I know it was sometime after they bought the house. Would we need to get the house appraised at the value when it was transferred to the trust to establish that "stepped-up basis" you mentioned? Also, what counts as a "capital improvement"? They've definitely done work on the house over the decades - new roof about 15 years ago, kitchen remodel in the 90s, bathroom updates, etc.

Yes, you would need to establish the fair market value of the home when it was transferred to the trust. If you don't have an appraisal from that time, you might need to work with a real estate professional who can help estimate the value based on comparable sales from that period. Capital improvements are substantial changes that add value to your home, prolong its useful life, or adapt it to new uses. The examples you mentioned - new roof, kitchen remodel, and bathroom updates - would all qualify. Other examples include adding rooms, finishing a basement, installing central air conditioning, or upgrading plumbing/electrical systems. Regular repairs and maintenance (painting, fixing leaks, etc.) don't count. Make sure your family has documentation for these improvements - receipts, contracts, etc. If they don't have records, they might be able to estimate reasonable costs based on contractor estimates for similar work during those time periods.

How exactly does this service work? Do you have to upload all your documents or something? My in-laws are facing a similar situation and I'm trying to help them figure out the tax implications.

I'm pretty skeptical of these online tax services... did they really save you a meaningful amount compared to just hiring a local tax professional? The capital gains on property held for decades can be massive.

Yes, you upload your documents like the trust paperwork, property records, receipts for improvements, etc. They have this really smart system that extracts all the important information and applies the right tax rules. You can also take pictures of paper documents if you don't have digital copies. Their analysis saved us over $22,000 in capital gains tax by properly documenting all the capital improvements made over 40 years and correctly establishing the stepped-up basis. We had consulted with a local tax guy first who missed several key deductions that taxr.ai caught. They're tax professionals too, but their system helps them catch everything and be really thorough with the documentation.

How does this even work? The IRS phone system is notoriously impossible to navigate. Do they have some special access or something?

Yeah right. I've been trying to get through to the IRS for months about a trust issue. No way they got you through in 15 minutes when the IRS's own stats show average wait times of 80+ minutes. Sounds like marketing BS to me.

They use a system that navigates the IRS phone tree automatically and waits on hold for you. When an actual agent picks up, you get a call connecting you directly to that agent. It's not special access - they're just using technology to handle the painful waiting part. I was extremely skeptical too. I had already spent over 2 hours on hold across multiple attempts before giving up. Claimyr had me connected to a real IRS agent in about 12 minutes. The system called me when the agent was on the line, and I got all my questions answered about capital gains calculations for trust properties. It saved me from having to take another day off work just to sit on hold.

I thought 1031 exchanges don't apply to personal residences though? Since OP and his wife have been living there as their home, would it still qualify?

You're right that 1031 exchanges don't apply to personal residences for the people living in them. However, in this case, the trust owns the property, not OP personally. Since the trust members (dad/aunt/uncle) haven't been using it as their primary residence, it might qualify as an investment property from their perspective, especially if OP has been paying rent to the trust. If no rent has been paid and the arrangement was purely for caretaking purposes, the IRS might still consider it a personal residence of the trust beneficiaries by extension. It's definitely a gray area that would require consultation with a tax professional who specializes in real estate and trusts.

That's interesting! How would medical expenses offset capital gains? Are they directly deductible against the gain, or is it more complicated than that?