QPRTs are set up with long-term intent. But situations change, and sometimes the grantor wants to sell the home and buy another one.
In this guide, we detail how to handle the sale of a residence in a QPRT.
Background
A Qualified Personal Residence Trust (QPRT) is in many respects similar to a GRAT, except a QPRT is required to be funded with a personal residence, and the grantor retains the right to use the residence for a term of years instead of the right to receive annuity payments.
This can be very advantageous from a transfer tax perspective, as the value of the personal residence will presumably appreciate during the term of the retained use by the grantor and that, coupled with the initial discount in the value of the gift to the QPRT, creates significant transfer tax leverage.
By way of illustration, assume that a 55-year-old grantor transfers a $1 million residence to a QPRT and retains the right to use and occupy the residence for ten years. At the end of the ten years, the residence will be transferred to the grantor’s children. Assuming a 7520 rate of 6% during the month of transfer, the grantor will be deemed to have made a taxable gift of approximately $495,000.
However, assuming the grantor has an adequate applicable exclusion amount remaining, there will be no current gift tax payable. Further assuming that the property appreciates at approximately 7% over the 10-year term of the QPRT, the residence will be worth almost $2 million at the time it is transferred to the grantor’s children. The grantor will have transferred property now worth approximately $2 million to their children and reported only a $495,000 taxable gift.
Sale of Residence or Home
Even though a QPRT is required to must hold a residence, the QPRT status itself will not necessarily terminate if the house is disposed of during the QPRT term. The IRS provides that a QPRT can continue and hold any sales proceeds until the earliest of:
- Two years after the date of sale.
- The QPRT acquires a new residence.
- The QPRT term ends.
The trust agreement is required to allow the trust to hold the sales proceeds. If the trust agreement fails to do so, the trust will cease to qualify as a QPRT even if the funds are otherwise maintained in compliance with the requirements.
Replacement Rules
If the QPRT reinvests all of the funds from the home sale by purchasing a new home of equal or greater value and does so before the earlier of two years from the sale date or the date the QPRT term ends, the trust’s QPRT status will continue.
The replacement home must meet the same rules and requirements as the original home. Accordingly, the replacement home must be held or used as the primary residence or another house of the grantor (vacation home).
The QPRT will usually qualify as a grantor trust. As such, the grantor can exclude up to $250,000 ($500,000 if married filing jointly) of gain on the sale in the QPRT as long as the requirements are met. The main requirement is that the home was used as the grantor’s primary residence for at least two of the preceding five years.
Sample QRT Language
Let’s take a look at some example language that we saw recently in a QPRT trust document:
Prohibition on Sale of Personal Residence to Transferor or any Related Parties. The Trustee will be prohibited or restricted from transferring or selling (as defined in § 25.2702-5(c)(9) of the code regulations) the Residence, either directly or indirectly, to the Transferor, the spouse of the Transferor spouse, or any entity that is controlled as such by the Transferor or by the Transferor’s spouse during the Transferor’s retained interest term of the QPRT, or at any time subsequent to the termination of the QPRT retained interest term while the trust itself is treated as owned in whole (or even in part) by the Transferor or the Transferor’s spouse under section §§ 671 through 678 of the IRS Code.
Conclusion
Fortunately, QPRTs have some flexibility when it comes to the sale of the residence. The good news about these trusts is that you have options, and in the majority of situations, you can maintain QPRT status.
