Updated August 1, 2026. Quick answer: putting your house in an irrevocable trust can protect it — and if the trust is built so the house leaves your taxable estate, it also throws away the step-up in basis. The IRS said so directly in Rev. Rul. 2023-2: where a grantor funds an irrevocable trust by completed gift and the assets are not includible in the gross estate, “the basis of Asset immediately after A’s death is the same as the basis of Asset immediately prior to A’s death.” Your heirs inherit your old basis and pay capital gains on decades of appreciation. Nobody puts a dollar figure on that. This does:
What losing the step-up actually costs you
The ruling, in its own words
Rev. Rul. 2023-2 frames the question exactly as a homeowner would, if homeowners wrote like the IRS:
“Is there a basis adjustment under §1014 of the Internal Revenue Code to the assets of a trust on the death of the individual who is the owner of the trust under chapter 1 of the Code if the trust assets are not includible in the owner’s gross estate pursuant to chapter 11 of the Code?”
The answer is no. The holding turns on a technical point with a very practical consequence: §1014(b) lists the seven kinds of property treated as “acquired from a decedent”, and that list is exclusive. Property given away in a completed gift during life is not on it:
“If A funds T with Asset in a transaction that is a completed gift for gift tax purposes, the basis of Asset is not adjusted to its fair market value on the date of A’s death under §1014 because Asset was not acquired or passed from a decedent as defined in §1014(b).”
Note what does not save you: being a grantor trust for income tax purposes. Many irrevocable trusts are deliberately drafted so the grantor keeps paying the income tax — that is usually a feature. It has no bearing here. Income-tax ownership under chapter 1 and estate inclusion under chapter 11 are separate questions, and only the second one moves basis.
The question that decides your answer
Everything hinges on whether the trust assets are includible in your gross estate. The ruling’s facts are explicit that they were not. Plenty of irrevocable trusts are drafted the other way — keeping the assets in the taxable estate on purpose, precisely so the step-up survives — and for those, the ruling simply does not apply. So the useful question for your attorney is not “is my trust irrevocable?” but “are the assets includible in my gross estate, and under which Code section?” Ask it in writing.
The trade-off is real in both directions. An asset kept in your estate keeps the step-up and stays exposed to whatever the trust was meant to protect against. An asset moved out is protected and carries its old basis forever. There is no version where you get both, and the calculator above prices the side you are choosing.
Where this sits next to the rest of the picture
If the reason you are considering this is long-term care, start with whether Medicaid can actually take your house — that page covers the lookback and what a properly built trust does and does not protect, and it is the prior question. For how a trust’s own gains are taxed while you are alive, see when capital gains stay in the trust. The basis rules themselves have edges worth knowing: a step-up can also be a step-down, retirement accounts never get one at all, and married couples in community-property states get a double step-up that changes this maths entirely. General overview of trust taxation: our trusts guide.
One distinction before you shop
The irrevocable trust this page prices is attorney work by nature — the Medicaid and estate-tax versions turn on drafting choices a form cannot make for you. What a platform does sell is the revocable kind, which is a different instrument with a different purpose. LawDepot builds a state-specific revocable living trust if that is what your situation actually calls for.
See the revocable living trust
LawDepot pays us a commission if you buy through this link — it costs you nothing extra. We are not a law firm and this is not legal advice. Affiliate Disclosure.
The number that surprises people who bought a long time ago
Downsizing is the one home sale where the gain is usually large and the exclusion usually still covers it. A couple who bought in 1994 for $180,000 and sell at $760,000 with $46,000 of selling costs have a realized gain of about $534,000 before improvements. That is above the $500,000 joint cap — but decades of capital improvements are exactly what brings it back under, and most sellers have never added them up.
Improvements are the lever, and the records are the constraint
A new roof, an addition, a replaced HVAC system, new windows, a finished basement: these add to basis. Repainting and repairs do not. Thirty years of improvements on a family home routinely total six figures, and every dollar of it reduces the gain dollar for dollar. The practical problem is documentary, not legal — the seller who kept receipts pays less than the identical seller who did not.
Why downsizers should check the net investment income tax separately
A retiree with modest ordinary income can still be pushed over the 3.8 percent NIIT threshold by the sale itself, because taxable gain is net investment income. The thresholds are $250,000 on a joint return and $200,000 otherwise, written into Section 1411(b) as fixed figures with no indexing. A sale that produces $120,000 of taxable gain on top of $180,000 of other income crosses the joint threshold and picks up 3.8 percent on the part above it.
The move itself may change the tax
Downsizing usually means moving, and sometimes across a state line. Some states tax the gain the federal exclusion just removed. If the sale and the move are in the same year, the order of the two matters, and it is worth checking the destination state before signing.
Related
Methodology
- Exclusion caps, the 2-of-5 test, the nonqualified-use allocation, the reduced-exclusion fraction and the depreciation carve-out are taken from the text of 26 U.S.C. 121. The 3.8 percent rate and its thresholds are from 26 U.S.C. 1411. Both were read on 2026-07-30.
- Section 121 caps and Section 1411 thresholds are written in the statute as fixed dollar amounts with no indexing mechanism, so they are built in. Long-term capital gain brackets ARE indexed annually, so your rate is an input rather than a lookup.
- Figures were computed by two independently written engines that agree to the cent, and the calculator on this page reproduces both exactly.
- Federal only. State treatment varies and some states do not follow the federal exclusion.
Educational estimate, not tax advice, and not a filed return. Federal only. Confirm anything that changes a filing decision with a CPA or tax attorney.
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