The short answer
First work out what kind of trust it is. A revocable trust, or any other grantor trust, is ignored for income tax, so the sale is taxed on the grantor's own return at individual rates. A non-grantor trust is its own taxpayer, and its gain usually stays in the trust because capital gains are generally kept out of distributable net income. For 2026 those trust brackets are compressed: 20% on long-term gain above $16,250 of taxable income, and 3.8% net investment income tax above $16,000. The depreciation slice is capped at 25% as it is for individuals.
At a glance
| Grantor trust | Not a separate taxpayer; the grantor reports the sale |
|---|---|
| Non-grantor trust | Its own taxpayer filing Form 1041 |
| Trust 0% band, 2026 | Up to $3,300 of taxable income |
| Trust 15% band, 2026 | Up to $16,250; 20% above |
| Trust ordinary brackets, 2026 | 10%, 24%, 35%, then 37% above $16,000 |
| Trust NIIT | 3.8% on undistributed net investment income above $16,000 of AGI |
| Gain and DNI | Generally excluded, so taxed to the trust unless distributed or allocated |
| Trust AMT | $31,400 exemption, phasing out from $104,800 |
A grantor trust's sale goes on the grantor's own return
The Instructions for Form 1041 describe a grantor type trust as one that "isn't recognized as a separate taxable entity for income tax purposes because the grantor or other substantial owners have not relinquished complete dominion and control." Every revocable living trust is one, because section 676 treats a grantor who can revoke as the owner.
So if the rental sits in a revocable trust, nothing about the trust changes the rates. The sale is taxed exactly as if you owned the property in your own name, using the individual stacking described in how the gain stacks on your other income.
Some irrevocable trusts are also grantor trusts, for example where the grantor keeps certain powers or the income can benefit the grantor's spouse under section 677. The trust document tells your CPA which kind you have.
A non-grantor trust reaches the top rates after about $16,000 of income
Rev. Proc. 2025-32 sets the 2026 estates and trusts schedule at 10% to $3,300, 24% to $11,700, 35% to $16,000 and 37% above. For long-term gain the 0% band ends at $3,300 and the 15% band at $16,250, so almost all of a meaningful sale is taxed at 20%.
Unrecaptured section 1250 gain is capped at 25% for trusts as for individuals, since section 1(h) applies to the trust's tax. With brackets this short, the trust's lower brackets fill quickly and most of that slice is taxed at the full 25%.
The surtax comes early as well. Section 1411(a)(2) taxes a trust at 3.8% on the lesser of its undistributed net investment income or its AGI above the dollar amount where the top bracket begins, which is $16,000 for 2026.
The gain usually stays in the trust even when income is paid out
A trust that distributes income gets a deduction and the beneficiaries pay the tax, but only up to distributable net income. Section 643(a)(3) excludes gains from the sale of capital assets allocated to corpus and not paid, credited or required to be distributed, and Reg. section 1.643(a)-3 says such gains are "ordinarily excluded" from distributable net income.
The regulation lists the exceptions: gain allocated to income under the trust instrument or local law, gain allocated to corpus but consistently treated as distributed on the trust's books and returns, and gain actually distributed or used to determine a distribution. If one applies, the beneficiary reports the gain at their own rates, which can be lower.
Whether those exceptions are available depends on the trust instrument and state law, so the trustee's discretion matters as much as the tax tables. The broader planning is in capital gains on real estate sold by a trust or estate.
Worked example: the same $300,000 gain inside and outside a trust
Hypothetical, 2026, round numbers, the trust's personal exemption and state tax ignored; run your own numbers with your CPA. A non-grantor trust with $10,000 of retained net rent sells a rental for a $300,000 gain, $60,000 of it depreciation, and keeps the proceeds.
The depreciation slice is taxed at 24% for $1,700 and 25% for the rest, about $14,983. Another $4,550 of gain fills the 15% band and $235,450 is taxed at 20%, for about $47,773 more. The surtax applies to $294,000, about $11,172. The sale costs the trust roughly $73,900 federal.
Reported instead by a married grantor with $150,000 of other taxable income, the depreciation slice falls in the 22% bracket and the remaining $240,000 at 15%, about $49,200, plus about $8,824 of surtax. That is roughly $58,000, so the trust pays about $15,900 more on the same sale.
A trust can exchange, but the trust has to be the buyer
A non-grantor trust is the taxpayer, so it must sign the exchange agreement and take title to the replacement, as covered in trust-owned 1031 strategies. A grantor trust can sell in the trust's name and buy in the grantor's, explained in selling in your own name and buying in a revocable trust.
If a trust must terminate mid-sale, the IRS has issued private guidance on beneficiaries exchanging distributed interests. In PLR 202416012 a testamentary trust's term ended during negotiations; the IRS ruled that an undivided interest distributed to a beneficiary's single-member LLC, under a court-approved termination plan, could still be held for investment for section 1031. A private ruling binds only the taxpayer who received it.
For a trustee who wants to stop managing property, a Delaware Statutory Trust interest is replacement real estate a trust can hold, covered in whether a DST can be held in an LLC or trust.
Related questions
Does the trust have to make estimated tax payments on the sale?
Generally yes, on Form 1041-ES. Publication 505 says estates and certain grantor trusts receiving the residue of a decedent's estate are exempt for the first two years after death.
Is an estate taxed the same way as a trust?
The same compressed 2026 schedule in Rev. Proc. 2025-32 covers estates and trusts. What differs is the administration; see what happens if the owner dies mid-exchange.
Can the trustee distribute the gain to beneficiaries to use their lower rates?
Only if the trust instrument or state law allows the gain to be treated as distributed under Reg. section 1.643(a)-3(b), and the trustee does so consistently. Ask the trust's CPA before the sale closes, not after.
Does the trust face AMT on a large sale?
It can. The 2026 trust exemption is $31,400 and phases out from $104,800 of AMT income, so a large gain removes it quickly. See AMT when selling a rental.
Does the trust get a step-up when the grantor dies?
That depends on whether the property is included in the grantor's estate under section 1014, which turns on the trust's terms. The irrevocable-trust version of that question is covered in no step-up trusts and the 1031.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- IRS, Instructions for Form 1041 (grantor type trusts)
- 26 U.S.C. section 676, power to revoke (Cornell LII)
- 26 U.S.C. section 677, income for benefit of grantor (Cornell LII)
- IRS, Rev. Proc. 2025-32, 2026 estates and trusts brackets and capital gains breakpoints
- 26 U.S.C. section 1(h), maximum capital gains rate (Cornell LII)
- 26 U.S.C. section 1411, net investment income tax (Cornell LII)
- 26 U.S.C. section 643, definitions for subparts A to D (Cornell LII)
- 26 CFR section 1.643(a)-3, capital gains and losses (Cornell LII)
- IRS, PLR 202416012 (January 22, 2024)
- IRS, Publication 505, Tax Withholding and Estimated Tax