Inherited House Held in a Trust: Tax Treatment Differences

Revocable living trust

The grantor retained the right to amend or revoke the trust. The property is treated as the grantor's for estate-tax inclusion, so §1014 step-up applies in full. From a tax standpoint, the heir is in the same position as if the property had passed by will.

Irrevocable trust

No step-up if the trust was funded during life and the grantor gave up control — the basis carries over from the grantor's original purchase. Step-up does apply if the trust was structured so the assets remained includible in the decedent's gross estate (e.g., grantor retained a life estate).

Selling out of the trust

The trustee can sell directly from the trust before distribution, or distribute the house to beneficiaries first. Either way, the gain (computed against the correct basis) is taxable to whoever holds the property at sale — the trust on Form 1041, or the beneficiary on Form 1040.

Sources

• IRC §1014 — Basis of property acquired from a decedent
• IRS Publication 559 — Survivors, Executors, and Administrators

Frequently asked questions