What are the Tax Consequences if I Transfer Real Estate into Trust?

Posted December 20, 2019

Question:

If I transfer real estate into a regular trust, does it constitute a sale and result in capital gain tax and property basis step-up? What if I transfer it to a nominee trust?

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Response:

I am going to assume that by “regular” trust you mean a revocable trust. I also assume that by “transfer” you don’t mean a sale of the property.

If the trust is revocable, for tax purposes you are considered to be the owner. This means that a transfer has no tax effect. You would not incur capital gains and the property’s tax basis would not be adjusted.

This is also true of a transfer of the property to a nominee trust of which you are the beneficiary. It would not change the tax situation and you would not incur any capital gain or adjustment in basis. (For those wondering what a nominee trust is, it’s a simple form of property ownership used most commonly in Massachusetts through which the true ownership of the property can be hidden. It can also facilitate annual transfer of property interests among owners, for example from parents to children.)

All of the above assumes you’re talking about a revocable trust or that you would be the beneficiary of the nominee trust. If you were to transfer the property into an irrevocable trust or a nominee trust of which someone else was the beneficiary, this could be a gift for tax purposes. You would be required to file a gift tax return, but there would be no actual gift tax. The new owner would receive a “carry-over” basis, meaning it (if a trust) or they (if a person) would receive it with the same basis as yours. No capital gain would be incurred due to the transfer.

What are the Tax Implications of Owning Property in Nominee Realty Trusts?

How Does the Sale of Property Owned by a Nominee Realty Trust Work?

What’s a “Step-Up” in Basis and Why Would You Want It?