Personal Residence transferred to Irrevocable Trust

Client is planning to take out a HELOC on his personal residence (no mortgage on the property currently). He has set up an irrevocable family trust through his attorney with his mother as the "Settlor" and himself as the trustee. Along with obtaining the HELOC the client has spoken with the bank about transferring the property to the trust. Because the property is currently his principle residence, would the home sale exclusion still be available upon sale of the property? How about the ability to deduct the interest and taxes on his personal taxes?

"would the home sale exclusion still be available upon sale of the property"

The attorney has to set up the trust to be a grantor trust under IRC 671-679. See Reg 1.121-1(c)(3). Also see Rev Rulings 66-159,85-45 & 54-583.

My client, husband and wife set-up a living trust (Grantor Trust) in 2010. Wife dies in 2013. Wife's share of assets are allocated to a irrevocable trust (A-B). Husband, trustee of the irrevocable trust, transfers 100% of the personal residence along with other assets to the irrevocable trust. A year later, 2014, the husband acting as trustee of the irrevocable trust sells the personal residence at a $40,000 gain. The husband lived in the residence but needed to move to an assisted living facility. Both had lived in this residence for over 2 years. It is my understanding that the Section 121 exclusion will not apply because the trust owns the personal residence. If the husband had not allocated the personal residence to the irrevocable trust, than the section 121 exclusion ($250,000) would offset the $40,000 gain. The sale was finalized June 4, 2014. Is my analysis correct? Thanks.

Because the property is currently his principle residence, would the home sale exclusion still be available upon sale of the property?

Maybe not--Section 121 does not generally apply to a home owned through an entity rather than directly. Reg 1.121-1(c)(3) provides a limited exception to the extent the grantor can still be treated as a substantial owner.

Thank you everyone for your responses. Their attorney got back to them that the trust was NOT designed to transfer assets rather the assets must be sold to the trust. In any event this trust was not designed to hold a primary residence in any way shape or form as the exclusion, and other tax benefits would be lost. Something told me this wouldn't be a good idea.

I received the article below from a fellow CPA regarding the same question. Found it helpful so I thought I'd pass it along.

http://www.journalofaccountancy.com/Iss ... imited.htm