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I probably am not the first to think of this and the IRS most likely has this covered but if one wanted to put their rental into a trust and then have the trust sell it, would they save on taxes since they no longer own the rental?

The rental in question is located outside the U.S., the one who wants to do this files a 1040 each year.

Even if this is doable, who controls the rental, the trust doesn't think for itself so decides to sell it for the trust?

2 Answers 2

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If the trust is a revocable grantor trust (i.e.: the grantor is the trustee and the beneficiary and can change the trust any time), then it is invisible to the IRS and is indistinguishable from the grantor. While legally the ownership changes, for tax purposes the trust is disregarded.

If the trust is irrevocable (i.e.: the grantor has no control over trust document once it is created), then the trust is its own legal and tax entity, and the grantor has gifted the property to the trust. The grantor needs to deal with the gift tax, the trust needs to file informational return and pay tax if income is not distributed to beneficiaries, and the beneficiaries will pay tax on the income distributed. The tax basis for the gifted property remains the same as it was for the original grantor.

Since it's a foreign trust, there are additional complications since the legal determination of the trust is by the local jurisdiction. What may be irrevocable in the US may be revocable there, and vice versa. What may be a trust in the US may actually be considered a corporation there, and vice versa.

Bottom line: if this scheme has any effects on taxes - it would be for the worse. If the intention is to try and save on taxes - then you won't.

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What you are missing: Trusts have to pay income tax too, and the rates are higher than personal income tax. There is also no standard deductible for them.

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    Not necessarily, but if trust is required to pay taxes, then the taxes are draconian compared to individual rates, you're right.
    – littleadv
    Apr 25 at 21:28

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