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Revocable Trusts

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A: There are no immediate tax implications. As far as the IRS is concerned it is still a primary residence.

A1: If the owner was a single individual, the basis of the property would be step-up to the value as of the date of death. Therefore, a sale would use that date of death value as the basis for computing gain or loss. And yes, there can be a loss because once the grantor of the trust dies, the property is no longer a residence but is now investment property.

A2: If the owner was married at the date of death then the answer is much for complicated depending on the state of residence. If it is a community property state such as California, and if the house is titled in the name of the revocable trust, both halves of the house step up to fair market value for purposes of basis. If the surviving spouse continues to live there, and there is more appreciation, and then sells later, the exclusion still applies to any additional gain. I am not sure how this works in non-community property states since I live in California.

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