My father’s house was in a Medicaid Asset protection Trust. I have confirmed it gets a step
Up in basis.

Question

Will we also benefit from the single $250,000 capital gains exemption. His trust was a grantor , Medicaid asset protection trust and considered part of his estate at death.  He lived in the house for 45 years and died in it as well. He maintained some control of the trust with limited power of appointment, able to change trustee, substitution clause.. etc  
 
If not my sibling a beneficiary of the trust lived in the house her entire life . Would that help?

Nina Whitehurst · Answer

It is common for the grantor of a Medicaid Asset Protection Trust (MAPT) to retain just enough controls to trigger estate inclusion at the death of the grantor and, therefore, to cause the assets in the MAPT to obtain a step up in basis at the death of the grantor.   
 
If a residence is owned by the MAPT, for the period that the grantor was treated as the owner for federal income tax purposes pursuant to IRC sections 671 through 679 (relating to the treatment of grantors and others as substantial owners), the grantor will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the MAPT will be treated as if made by the taxpayer.  The other requirement of Section 121 is occupancy for 2 of the last 5 years.

Gregory M. Lendino · Answer

The good news is that since the house was held in a Medicaid Asset Protection Trust (MAPT) that was a grantor trust for income tax purposes and included in your father’s estate for estate tax purposes, it should qualify for a step-up in basis upon his death. This means that the basis of the house is adjusted to its fair market value as of the date of his passing, potentially eliminating capital gains tax if you sell the property soon after. 
 
Regarding the $250,000 Capital Gains Exemption the seller must have: 
 
Owned the home for at least 2 of the last 5 years before the sale, and 
Used it as their primary residence for at least 2 of the last 5 years before the sale. 
 
A well drafted, and executed, MAPT could qualify for the 250,000 exemption. 
 
Would Your Sibling’s Residency Help? 
If your sibling (a beneficiary) lived in the home their entire life, it could be relevant only if they were the legal owner at the time of sale. However, simply living there does not necessarily grant the § 121 exemption unless: 
 
The property was distributed outright from the trust to the sibling before the sale, and 
The sibling met the ownership and use tests for at least 2 of the last 5 years as their primary residence.

Q: My father’s house was in a Medicaid Asset protection Trust. I have confirmed it gets a step Up in basis.