Will I Be Taxed on Rental Properties Because of Trust Switch?

by Loella Dotterer Haskew, CPA

I have two 1031 exchange residential rental houses placed in trust. As the beneficiary, I want to take out equity in those two houses. For this to happen, the lender wants me to pull the properties out of trust in order to get the loan. I then would put the properties back in the trust. Does this create a taxable event?

Your question is not clear as to the kind of trust used to hold the real estate properties. So I’ll assume that these properties are in a revocable living trust, you are the settler (creator of the trust) and the income beneficiary, and you can still change any provision of the trust until your death. If that is the case, the trust is called a grantor trust. The trust essentially is ignored for tax purposes, and you are treated as owning the property as if the trust did not exist. You can, therefore, take the property in and out of the trust as you want to without income tax consequences. Of course, since this living trust is designed to implement your estate plan, you would want to return the title of the properties to the trust as quickly as you can so that the provisions of the trust can apply.

Loella Dotterer Haskew is a Lafayette, Calif., CPA with the firm of Buckley Patchen Riemann & Hall. You can reach her at (925) 284-5262.