Capital Gains on Real Estate Sold by a Trust or Estate

Which trust is selling decides whose brackets apply

Section 671 provides that where the grantor is treated as owner of a trust, the trust's items of income, deductions and credits are 'included in computing the taxable income and credits of the grantor'. A revocable living trust is the common case: the trustee signs the deed, but the sale is reported on the grantor's Form 1040 with the grantor's standard deduction, the $98,900 and $613,700 joint breakpoints of Rev. Proc. 2025-32 and the $250,000 surtax threshold. Selling in your own name and buying in a revocable trust covers the exchange mechanics for that trust.

An irrevocable non-grantor trust, and an estate, are separate taxpayers. Section 641(b) computes their taxable income 'in the same manner as in the case of an individual, except as otherwise provided', and the main exception is the deduction for distributions to beneficiaries. The trust files Form 1041, and the Form 1041 instructions require a return once a trust has any taxable income or $600 of gross income.

Some irrevocable trusts are still grantor trusts for income tax because the grantor kept a power listed in sections 673 through 677. The trust agreement and the trustee's accountant settle which one you have before the sale is reported.

A non-grantor trust reaches the top rates on the first dollars

Rev. Proc. 2025-32 sets the 2026 estate and trust table: 10% up to $3,300, 24% to $11,700, 35% to $16,000 and 37% above $16,000. For long-term gain the zero-rate amount is $3,300 and the 15% amount is $16,250, so 20% applies to gain above that. The 25% ceiling on unrecaptured section 1250 gain applies to a trust as it does to an individual.

Section 1411(a)(2) charges the 3.8% surtax on the lesser of a trust's undistributed net investment income or its adjusted gross income over 'the dollar amount at which the highest tax bracket in section 1(e) begins', which is $16,000 for 2026. A trust that keeps a real estate gain therefore pays 23.8% on nearly all of it, and 28.8% on the depreciation layer. When the 20% rate applies compares the individual thresholds.

The trust's rental income while it owns the property is in the same compressed table, which is why many trustees distribute income annually. The question at sale is whether the gain can be distributed the same way.

Capital gains usually stay in the trust, and three exceptions move them to the beneficiaries

A trust's distribution deduction is limited to distributable net income. Section 643(a)(3) excludes capital gains from DNI 'to the extent that such gains are allocated to corpus and are not (A) paid, credited, or required to be distributed to any beneficiary during the taxable year'. The default under most trust instruments and state principal-and-income law is that a sale gain belongs to corpus, so it stays in the trust and is taxed at the trust's rates even if the trustee distributes all the income.

Reg. section 1.643(a)-3(b) lists the three ways gains enter DNI: they are allocated to income under the governing instrument, local law or a reasonable exercise of fiduciary discretion; they are allocated to corpus but 'treated consistently by the fiduciary on the trust's books, records, and tax returns as part of a distribution to a beneficiary'; or they are allocated to corpus but 'actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed'. The regulation's paragraph (d) adds that in the year a trust terminates all gains are included in DNI.

Two timing tools help a trustee who can use an exception. Section 663(b) lets an amount 'properly paid or credited' within the first 65 days of the next year be treated as paid on the last day of the sale year, if the fiduciary elects. And a trust that is winding up can make the sale year its final year, which carries the gain out automatically.

A hypothetical $400,000 gain: taxed in the trust versus carried out

Hypothetical: an irrevocable non-grantor trust sells land it has held for years at a $400,000 long-term gain with no depreciation and no other income. Compare keeping the gain with carrying it out to a married beneficiary whose other taxable income is $100,000.

• Kept in the trust: $3,300 at 0%, $12,950 at 15% (about $1,900), $383,750 at 20% (about $76,800), plus the surtax on about $384,000 (about $14,600). Roughly $93,300.
• Carried out to the beneficiary: the $400,000 sits on top of $100,000 of other income, entirely inside the 15% band that ends at $613,700, so $60,000 of income tax, plus the surtax on modified adjusted gross income above $250,000, roughly $10,700. About $70,700.
• The difference is about $22,600 on this gain, and it widens with a depreciation layer or a beneficiary in a lower bracket. Whether the trustee may carry the gain out depends on the instrument and state law, so run your own numbers with your CPA and the trust's counsel.

A trustee can exchange instead of selling, and the replacement can be a DST interest

Section 1031 asks only that the same taxpayer sell and buy. A trust that holds investment real estate can relinquish it, have a qualified intermediary hold the proceeds and take title to replacement property in the trust's name, and the deferred gain never enters the trust's compressed brackets. The trustee needs authority under the instrument to buy real estate and, for a DST interest, to hold a securities-type investment; 1031 strategies for trust-owned property covers the authority question.

An exchange is especially useful where the beneficiaries will not get a stepped-up basis at the grantor's death. Trusts that miss the step-up explains which trusts those are and why deferral matters more for them. How a DST interest is held through an LLC or trust and transferring DST interests to heirs and trusts cover the holding mechanics.

An estate during administration follows the same brackets but has its own basis, filing-year and distribution rules; taxes when an estate sells a rental before distribution covers them.