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Ask the Expert: How a revocable trust is taxed

A few years ago I placed my house in a revocable trust. The value of the house was then approximately $550,000. I'm now in contract to sell the house at the same price, $550,000. Are there any taxes due on the sale? Should the proceeds be deposited into the trust account? How are the distributions from the trust taxed?

For tax purposes, you still own all the assets in your revocable trust. As a result, they're taxed the same way they'd be taxed if they were outside the trust.

When you sell a house that you've owned and lived in for two of the past five years, you get a tax exclusion on up to $250,000 of your profit on the sale (up to $500,000 for a married couple filing jointly). Your profit is the sale price, net of sales-related expenses like brokers' commissions and legal fees, minus your original cost, plus any capital improvements. (A capital improvement is an investment that increased the value of the house, like the addition of a bathroom.)

You may have no taxable profit. You don't say what you originally paid for the house. But let's say it was $550,000. After you subtract your expenses from the $550,000 sale price and add capital improvements to that hypothetical $550,000 original cost, you might be selling at a loss. Unfortunately, losses on the sale of a personal residence aren't tax deductible.

Depositing the proceeds into your revocable trust has no tax consequences. Contrary to popular belief, a revocable trust doesn't change your tax bill, protect assets from creditors or help you qualify for Medicaid. Its main advantages are that a designated co-trustee can manage your financial affairs if you become incapacitated; and after your death, its assets go to the named trust beneficiaries, bypassing probate.

The bottom line

A revocable trust isn't a tax shelter.

More information

CORRECTION: This column has been changed to indicate that the example uses a hypothetical original purchase price for the home.

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