20 Jun This house is in a trust. Can we get the $500K gain exclusion?

Q. The law says joint filers can deduct $500,000 for capital gains on the sale of a home. A couple of years ago, my wife and I changed the title of our primary residence in New Jersey to her individual family trust. When we sell the house, does the title need to be in both our names to qualify for the $500,000 exemption?
— Homeowners

A. That’s an interesting question.

It depends.

Internal Revenue Code Treasury Reg. Sec. 1.121-1(c)(3) provides that if a home is owned by a trust, the taxpayer who is the owner of the trust (or the portion that owns the home) will be treated as owning the home for the purposes of the Sec. 121 capital gains exclusion, said Tom Szieber, a trusts and estates attorney at Avelino Law in Morristown.

Whether the taxpayer is considered an “owner” is based on any of the provisions of Sections 671 through 679 of the Internal Revenue Code, he said.

Szieber said among the ways a taxpayer is considered an “owner” of a trust are where the taxpayer has the power to revoke the trust (Sec. 676), has a reversionary interest in trust corpus or income exceeding five percent (Sec. 673), or has a “power of substitution,” whereby the taxpayer can, “in a nonfiduciary capacity . . . reacquire the trust corpus by substituting other property of equivalent value” (Sec. 675).”

So, he said, you and your wife would satisfy the requirements of Sec. 121 and qualify for the capital gains exclusion if at least one of you meets the definition of “owner” of the trust.

“However, you reference `her Individual family trust,’ which suggests that you are not a grantor of said trust,” he said. “You also mention `we’ — meaning you and your wife — selling the property. The aforesaid descriptions make it difficult to assess whether you and/or your wife would in any way be considered owner(s) of the individual family trust (it sounds as if you likely are not; your wife’s status is less clear.”

Even if at least one of you were deemed an owner, both of you would have to have used the residence as your principal residence for two of the five years ending with the date of sale to be eligible for the full $500,000 exclusion, he said.

Consider consulting with an attorney who can review the trust and advise based on the specifics of your situation.

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This story was originally published June 20, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.