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I expect that with a revocable trust the capital gains tax exclusion ($250,000 in gains) on my primary residence will still apply. Does that tax exclusion apply when I place my house in an irrevocable trust?

When I transfer that house to either type of trust, what is the cost basis, my original cost basis or the current value at the time of transfer? I want to transfer the house when I am about to reach my $250,000 limit in gains. If it takes my original cost basis, could I sell the house to a trust instead?

Edit: I have assets that I will be splitting roughly equally into a revocable trust (for heirs) and an irrevocable trust (for charity). I have a long time before retirement, so there isn't any urgency to dividing the assets, but I do feel like planning ahead allows for maximum tax efficiency.

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  • Is there any reason other than the capital gains tax angle to transfer your primary residence to an irrevocable trust? If you still have a mortgage on the property, then it will likely need to be re-financed or paid off. Also, you will lose the homestead exemption from property taxes that many states allow, the mortgage interest deduction, the property tax deduction etc on Schedule A, and so no. The capital gains are still hypothetical and I think that this is a prime example where the tax tail is wagging the common sense dog.
    – Dilip Sarwate
    Feb 25, 2017 at 23:17
  • @DilipSarwate I'm in a low property-tax state. I am already approaching $250,000 in gains, and I don't have a mortgage. There's no homestead exemption. I could also just trade up to a bigger house if I want to avoid the taxes. I'm likely going to put it in a trust sooner or later, and I'm really trying to figure out whether sooner or later is better.
    – NL - Apologize to Monica
    Feb 26, 2017 at 0:29

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If you are the living grantor of trust, then you will be considered the taxable owner of the house, and you will qualify for the 250/500 exemption as long as it is your primary residence.

This is called incidents of ownership.

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