They Put the House in a Living Trust in 2015 and Sold It This Spring. The IRS Still Gave Them the Married Couple’s $500,000, Because a Revocable Trust Is Invisible to the Tax Code

If you and your spouse put your home into a revocable living trust years ago, you didn’t lose the home-sale tax break. The tax code looks past the trust and treats the sale as yours, so when the trust sells the house, a married couple’s $500,000 capital gains exclusion still applies, even though the trust’s name is on the deed.

A couple who funded their trust in 2015 and sold this spring has held the house through more than a decade of price increases. The S&P CoreLogic Case-Shiller U.S. National Home Price Index was at 337.3 in July 2026 (January 2000 equals 100), up 1.9% year over year. Long-held homes carry large increases, making the exclusion worth real money.

Why Your Trust Vanishes at Tax Time

For income tax purposes, a revocable trust counts as a “grantor trust.” While you can cancel it, the IRS looks straight through the trust to you. A sale by your trustee counts as a sale by you. Each year the trust holds title counts as a year you own the home, and the increases go on your joint return, where the exclusion can erase them up to the limit.

Where the Tax Code Says So

The basis is 26 U.S.C. § 676(a): “The grantor shall be treated as the owner of any portion of a trust” when the power to take back title is exercisable by the grantor or a non-adverse party. Treasury Regulation § 1.121-1(c)(3)(i) carries that ownership over to the home-sale rules. If you are treated as the trust’s owner under sections 671 through 679, you are treated as owning the residence, and the trust’s sale counts as yours.

The exclusion itself lives in 26 U.S.C. § 121(a). It requires that you owned and used the home as your principal residence for at least 2 years during the 5-year period ending on the sale date. Section 121(b)(2) raises the cap to $500,000 for joint returns. The law sets the dollar amount without an inflation adjustment, so the cap is the same in 2026. IRS Publication 523 confirms it: up to $250,000 ($500,000 if married and filing jointly) of increases is tax-free.

Couples Who Qualify and Couples Capped at $250,000

To get the full amount, you must file jointly, and either you or your spouse must meet the ownership test, and both of you must meet the use test. Neither spouse can have excluded increases on another home sold during the 2-year period ending on the sale date. Spouses filing separately are each limited to $250,000.

Some sellers get no exclusion at all: people subject to the expatriation tax, and owners who got the home through a like-kind exchange in the past 5 years.

How to Claim It on a Trust-Owned Home

1. Pull the trust document and confirm it is still revocable. That power to revoke is what triggers § 676.
2. Check your use. Each spouse needs to have lived there as a main home for 2 years within the 5 years before the sale. Per IRS Publication 554, those years don’t need to be a single block of time.
3. Look back 2 years for any other sale on which either of you took the exclusion. Section 121(b)(3) allows only 1 sale or exchange every 2 years.
4. Figure the increases from your original purchase price plus improvements. Since the trust is disregarded, retitling the house in 2015 didn’t change your basis.
5. Report the 2026 sale on your joint return, which you file in 2027. If you can exclude all increases, you usually don’t need to report the sale.

When the Trust Stops Being Invisible

That treatment only lasts as long as the power to revoke does. Section 676 hinges on whether someone still has the ability to return title to the grantor, and without that, the trust no longer gets treated as yours. Once the trust becomes irrevocable, whether at death or because you converted it for asset-protection or long-term-care planning, it can become a separate taxpayer. A trust can’t live in a house, so it can’t pass the use test on its own. (The paperwork around that transition- ownership, beneficiary forms, trustee succession- is the kind of thing we include in a free estate checklist.)

Many joint trusts split at the first spouse’s death, and part of the property moves into an irrevocable share. If you’re the surviving spouse, § 121(b)(4) keeps the $500,000 cap only if you sell not later than 2 years after the date of death and the joint-return requirements were met right before the death. Publication 523 says that you haven’t remarried at the time of the sale. Once that window closes, a single filer’s cap is $250,000.

Two smaller traps depend on whether or not a trust is involved. Gain linked to periods when the home was a rental or second home after 2008 counts as nonqualified use, and the exclusion doesn’t cover that portion. You also recapture and pay tax on depreciation you took for a home office or rental space after May 6, 1997.

If a sale is coming up, collect the trust instrument, your original closing statement, and your improvement receipts before you list the house. Those three documents establish ownership, use, and basis, which are the three numbers the IRS checks.

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