No, putting a house in a revocable living trust generally does not avoid capital gains tax on a sale during your lifetime, as you're still considered the owner for tax purposes, but it doesn't prevent the primary residence exclusion ($250k/$500k) if you meet ownership/use tests. However, placing a home in an irrevocable trust often forfeits the primary residence exclusion, making capital gains tax more likely, though the main tax benefit for trusts comes after death through the step-up in basis, reducing gains for heirs.
Avoiding Capital Gains Taxes
Another potential benefit to an Irrevocable Trust is you can use it to avoid personal capital gains based on the value of the estate. From a tax perspective, the Trust is its own entity with its own Tax ID number.
If the Trustee of an irrevocable trust transfers an asset directly to a beneficiary rather than selling it, no capital gains taxes are immediately due.
The trust fund loophole refers to the “stepped-up basis rule” in U.S. tax law. The rule is a tax exemption that lets you use a trust to transfer appreciated assets to the trust's beneficiaries without paying the capital gains tax. Your “basis” in an asset is the price you paid for the asset.
If you die within 7 years of making a transfer into a trust your estate will have to pay Inheritance Tax at the full amount of 40%. This is instead of the reduced amount of 20% which is payable when the payment is made during your lifetime.
Putting your house in trust doesn't protect assets outside of the trust from probate. So if you want to avoid probate completely, you may want to move your other assets into the trust as well.
Capital gains tax rates
A capital gains rate of 0% applies if your taxable income is less than or equal to: $48,350 for single and married filing separately; $96,700 for married filing jointly and qualifying surviving spouse; and. $64,750 for head of household.
Tax Issues and Capital Gains
The tax rate for capital gains can be as high as 15%. However, parents can use strategies to reduce tax liabilities when transferring property to their children. For example, by transferring the property to children through a trust, you can potentially reduce or avoid estate taxes.
Suze Orman, the popular financial guru, goes so far as to say that “everyone” needs a revocable living trust. But what everyone really needs is some good advice. Living trusts can be useful in limited circumstances, but most of us should sit down with an independent planner to decide whether a living trust is suitable.
CGT Rate for Trusts: The CGT rate for trusts is 36%. This is higher than the individual CGT rate of 18%. However, if the trust distributes the capital gain to beneficiaries, the beneficiaries will be subject to CGT at the individual rate of 18%.
The 20% rule for capital gains refers to the highest federal tax rate for long-term capital gains, applying to higher income brackets when you sell investments (stocks, real estate) held for over a year, with lower rates of 0% and 15% for lower incomes, and even higher rates for special assets like collectibles. This rate kicks in for single filers earning over approximately $492,300 (2024) or $533,401 (2025), and higher for joint filers, making holding assets over a year a key tax strategy.
The simplest way to avoid capital gains tax is to regularly use your capital gains tax allowance (officially known as your annual exempt amount or AEA). How easy this is to do depends on the assets you are selling.
Second, capital gains taxes on accrued capital gains are forgiven if the asset holder dies—the so-called “Angel of Death” loophole. The basis of an asset left to an heir is “stepped up” to the asset's current value.
On a $100,000 capital gain, you'll likely pay 15% for long-term gains, resulting in about $15,000 in federal tax (plus potential state tax), but it could be 0% or 20% depending on your total taxable income and filing status, while short-term gains are taxed as ordinary income (potentially 22-24%).
The primary "one-time" capital gains exemption in the U.S. allows single filers to exclude up to $250,000 (or $500,000 for married couples filing jointly) of profit from selling their main home, provided they've owned and lived in it for at least two of the last five years before the sale. While it's often called a one-time exclusion, you can use it multiple times, but you must wait two years before claiming it again on another property.
If you don't put your home in a trust, it may go through probate—a legal process to settle your estate—after your passing. As many heirs have experienced, this can be time-consuming and costly. Thankfully, placing your home in a trust is a relatively simple process that may take a few days to weeks.
The crackdown has resulted in the ATO undertaking extensive audits of family trusts and historical distributions, and the issue of hefty Family Trust Distributions Tax (FTD Tax) assessments for noncompliance – being a 47% tax (plus Medicare levy) along with General Interest Charges (GIC) on any historical liabilities.
Children generally inherit significant amounts tax-free due to the high federal estate tax exemption, which is $13.99 million per individual for 2025, with a planned reversion to a lower amount ($5 million adjusted for inflation) in 2026, meaning very large estates are taxed, but most inheritances fall below this threshold, though some states have their own inheritance taxes. Heirs also benefit from the "step-up in basis," which lowers capital gains tax on inherited assets like stocks and real estate.
While California does not impose a strict, one-size-fits-all deadline for distributing a house held in a trust, the law does require trustees to act within a reasonable timeframe.