Hello and thank you for your question.
Answering your question requires a reasonable interpretation of the
following regulations, which are the only guidance that we've been
given:
"The governing instrument must provide that a trust ceases to be a
qualified personal residence trust if the residence ceases to be used
or held for use as a personal residence of the term holder. A
residence is held for use as a personal residence of the term holder
so long as the residence is not occupied by any other person (other
than the spouse or a dependent of the term holder) and is available at
all times for use by the term holder as a personal residence....
"If the governing instrument permits the trust to hold proceeds of
sale pursuant to that paragraph, the governing instrument must provide
that the trust ceases to be a qualified personal residence trust with
respect to all proceeds of sale held by the trust not later than the
earlier of --
(A) The date that is two years after the date of sale;
(B) The termination of the term holder's interest in the trust; or
(C) The date on which a new residence is acquired by the trust."
Regs. §25.2702-5(c)(7)
"Example 6
T transfers T's personal residence to a trust that meets the
requirements of a qualified personal residence trust, retaining the
right to use the residence for 12 years. On the date the residence is
transferred to the trust, the fair market value of the residence is
$100,000. After 6 years, the trustee sells the residence, receiving
net proceeds of $250,000, and invests the proceeds of sale in common
stock. After an additional eighteen months, the common stock has paid
$15,000 in dividends and has a fair market value of $260,000. On that
date, the trustee purchases a new residence for $200,000. On the
purchase of the new residence, the trust ceases to be a qualified
personal residence trust with respect to any amount not reinvested in
the new residence. The governing instrument of the trust provides that
the trustee, in the trustee's sole discretion, may elect either to
distribute the excess proceeds or to convert the proceeds into a
qualified annuity interest. The trustee elects the latter option. The
amount of the annuity is the amount of the annuity that would be
payable if no portion of the sale proceeds had been reinvested in a
personal residence multiplied by a fraction. The numerator of the
fraction is $60,000 (the amount remaining after reinvestment) and the
denominator of the fraction is $260,000 (the fair market value of the
trust assets on the conversion date). The obligation to pay the
annuity commences on the date of sale, but payment of the annuity that
otherwise would have been payable during the period between the date
of sale and the date on which the trust ceased to be a qualified
personal residence trust with respect to the excess proceeds may be
deferred until 30 days after the date on which the new residence is
purchased. Any amount deferred must bear compound interest from the
date the annuity is payable at the section 7520 rate in effect on the
date of sale. The $15,000 of income distributed to the term holder
during that period may be used to reduce the annuity amount payable
with respect to that period if the governing instrument so provides
and thus reduce the amount on which compound interest is computed."
Regs. §25.2702-5(c)(9)
I believe that a fair reading of example 6, notwithstanding the
requrement of section 25.2702-5(c)(7)(i), that a residence is held for
use as a personal residence of the term holder [only] so long as the
residence is not occupied by any other person (other than the spouse
or a dependent of the term holder) and is available at all times for
use by the term holder as a personal residence, is that your trustees
can buy Creekside from you within the 2-year period.
After all, the individual in example 6 had to live somewhere during
that 18 month interval - - the former residence had been sold and the
successor residence hadn't yet been bought. I don't see anything in
example 6 that would have called for a different result had the trust
grantor been the former owner of the property that the trustees bought
as the replacement residence.
As Grantor of the trust, you're not allowed to buy your home from the Trustees,
[See Regs. §25.2702-5(c)(9): The residence may not be sold to the
grantor or to the grantor's spouse during the original trust term or
at a time when the trust is a grantor trust with respect to the
grantor or his spouse, and the trustee is prohibited from selling or
transferring the residence, directly or indirectly, to the grantor,
the grantor's spouse, or an entity controlled by the grantor or the
grantor's spouse.]
but there is no restriction on the grantor being the person who sells
the replacement property to the trust.
See http://www.unclefed.com/Tax-Bulls/1996/PS-4-96.PDF
So although Google Answers cannot give legal advice that you can rely
on, I believe you can proceed in the manner that you describe.
Search terms used:
Searching the Treasury 2702 regulations for 'qualified personal
residence trust' turns up all the authority worth finding.
Thanks again for letting us help. Please share this answer with the
attorney who represented you in setting up the trust arrangement and
let me know if he or she agrees!
Google Answers Researcher
Richard-ga |
Request for Answer Clarification by
taxpayer-ga
on
17 Sep 2005 15:38 PDT
you have clarified that the qprt can buy creekside from me. however,
the remaining question is: can a qprt buy a residence and then
completely tear it down to build a new home. I actually called the
irs - the guy I spoke with indicated that since you cannot occupy a
home under construction, and certainly cannot occupy land (ie when the
existing home is torn down), then a qprt cannot buy a home, tear it
down and build a new one.
I understand his logic, but there is nothing that says a qprt must be
suitable for occupation at all times. I really dont see any
difference that if the qprt residence underwent a total remodel . . .
in that case, it likewise would be able to be occupied . . .
there is absolutely no tax avoidence under my requested scenario -
would the irs actually demand a certificate of occupancy??? how in the
world would the irs ever know that during the 2 year period the house
was torn down? not that I am trying to do anything against irs code,
but I have to say, I was shocked to find out that tearing the house
down and rebuilding was even questionable.
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Clarification of Answer by
richard-ga
on
18 Sep 2005 18:50 PDT
Hello again:
I think the important issue isn't so much the tearing down - - it's
what the QPRT can own during the permitted two-year interval between
selling residence A and buying substitute residence B, and how it
acquires substitute residence B. So I agree with the person you spoke
with at the IRS that Creekside isn't itself a substitute residence
until there's a residence there that you move in and occupy.
The QPRT in Example 6 sold residence A and for 18 months owned 'common
stock' which it then sold and used the proceeds to buy residence B,
and that was OK.
In your example as stated the QPRT has already sold residence A and
it's invested the proceeds in the separate account, which I suppose is
some sort of interest-bearing account not unlike the common stock
account in Example 6.
Meanwhile you personally purchased and own Creekside and that should
be irrelevant - - the trust doesn't own it. In other words, suppose
instead of you, I personally purchased Creeside, rented it out, and at
the lease end, tore the current house down and built a new one.
Surely I could sell the newly constructed residence to your qprt
trustees and as long as they made the purchase and you moved in within
the two-year period the situation would be exactly the same as Example
6.
So that's why my Answer focuses on whether there's anything wrong with
you, the trust settlor, being the person who sells the replacement
residence to the QPRT trustees. And I don't see anything in the law
or regs that says the trustees can't buy the replacement residence
from a person related to the settlor or from the settlor himself.
-R
|
Clarification of Answer by
richard-ga
on
18 Sep 2005 18:54 PDT
The above is based on your original question, where you said
"I went ahead and 'personally' purchased another home ('Creekside')
that will be torn down and a new home will be constructed on the site
that I then want the QPRT to own.
But in the clarification where you said
"can a qprt buy a residence and then completely tear it down to build a new home"
Since Example 6 descibes the qprt buying common stock, we don't really
know whether instead of common stock it's ok for a qprt to use its
sale proceeds to buy a residence, rent it out, tear it out, and build
a new residence.
But even if the answer to that is 'no,' your qprt isn't doing that, right?
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