How a QPRT Works to Reduce Estate and Gift Taxes

A qualified personal residence trust, or QPRT, works by splitting your home into two pieces of ownership and giving away only the cheaper one. You transfer the deed into an irrevocable trust, keep the right to live in the home rent-free for a set number of years, and name the people who will own it after that term ends. Because your beneficiaries have to wait, the IRS values their future interest at far less than the home is actually worth today, and that discounted figure is the only amount treated as a taxable gift. If you outlive the term, the home — plus every dollar of appreciation that happened along the way — leaves your taxable estate for a fraction of its real value.

The federal estate tax hits taxable estates above $15 million per person in 2026 at a top rate of 40%.¹² A QPRT is one of the main tools for people whose estates are approaching or already past that threshold and whose home is a large, appreciating piece of the picture.

What You Put In and Who Ends Up Owning It

You start by transferring the deed to your home into an irrevocable trust and naming the remainder beneficiaries, usually children or grandchildren. The trust document locks in the number of years you’ll keep the right to live there. When that period ends, the home belongs to the beneficiaries outright.

The property has to qualify as a personal residence under Treasury rules — either your principal home or one other residence you use personally. Adjacent land that’s reasonably appropriate for residential use counts, along with structures like a detached garage, but furniture and other personal property do not.³ You’re allowed to hold up to two QPRTs at once, one for a primary home and one for a secondary residence. Spouses who both own interests in the same home can put those interests into the same QPRT, as long as the trust bars anyone other than the two of them from holding a term interest at the same time.

With narrow exceptions, the trust can only hold the residence itself and insurance on it. Small amounts of cash are permitted for upcoming property taxes, mortgage payments, and improvements, and the trustee can hold sale proceeds if the trust is in the middle of replacing the home.⁴ Beyond that, the trust is meant to be a container for the house and nothing else.

How the Taxable Gift Shrinks

The entire tax advantage comes from the fact that you aren’t gifting the full value of the home. Under the special valuation rules of Section 2702, the IRS reduces the home’s fair market value by the actuarial value of your right to live there during the retained term.⁵ What remains — the remainder interest — is the taxable gift. Three variables drive the number:

Fair market value of the home, typically fixed by an independent appraisal at the time of the transfer.
Length of the retained term. A longer term means a bigger discount, because beneficiaries wait longer to take possession.
The Section 7520 rate, a discount rate the IRS publishes monthly equal to 120% of the federal midterm rate, rounded to the nearest two-tenths of a percent. For January 2026, the rate is 4.6%.⁶

A higher 7520 rate helps you. The rate functions as an assumed return on the trust property for the full term, so when it’s higher, the IRS assigns more value to your retained use of the home and less to the beneficiaries’ remainder. The taxable gift shrinks accordingly. Planners often watch the monthly rate and try to fund the trust during a relatively high month.

The remainder is a future interest, so the annual gift tax exclusion cannot shield any of it.⁷ Instead, the discounted amount uses up part of your $15 million lifetime gift and estate tax exemption. That trade is the entire point: you spend a smaller slice of exemption to move a much larger asset out of your estate. The gift gets reported on IRS Form 709 for the year of the transfer, even when no tax is owed because the exemption covers it.⁸

Any appreciation after the funding date passes to the beneficiaries free of gift and estate tax. A home worth $4 million at funding that grows to $8 million over a 15-year term adds nothing to your taxable estate. Your exemption was consumed only by the discounted remainder you reported on day one.

Living in the Home During the Term

For income tax purposes, the QPRT is a grantor trust while you hold the retained interest. The IRS disregards the trust as a separate taxpayer, and all income, deductions, and credits flow onto your personal Form 1040.⁹ The trust itself usually doesn’t file its own income tax return.

You keep paying property taxes, insurance, and upkeep, and none of those payments count as additional gifts to the beneficiaries. They’re the cost of using a home you still have the right to occupy. Property taxes and mortgage interest stay deductible on your return under the normal limits.

Grantor status also protects your Section 121 capital gains exclusion if the home has to be sold while the trust still holds it. If the home remains your principal residence and you’ve lived in it for at least two of the five years before the sale, you can exclude up to $250,000 of gain, or $500,000 on a joint return. That matters mostly if the trust ends up selling and replacing the residence mid-term.

If You Need to Sell the Home Before the Term Ends

You can sell the home during the term, but the rules are tight. After a sale, the trust may hold the cash proceeds for up to two years while the trustee reinvests in a replacement residence of equal or greater value. Miss that window and the trust loses QPRT status. The replacement deadline is actually the earliest of three dates: two years after the sale, the end of the trust term, or the date the trust actually buys the new residence. The trust agreement has to explicitly permit holding sale proceeds in the first place; without that language, the sale disqualifies the trust immediately.

If no replacement home gets bought, the trust has 30 days to deal with the leftover cash. The trustee can either distribute it to you or convert the remaining portion of the trust into a grantor retained annuity trust that pays you an annuity for the rest of the original QPRT term. In a GRAT conversion, the annuity payments are calculated from the date the home was sold, and any deferred payments must accrue interest at no less than the Section 7520 rate.³ The trust document needs to lay out these contingencies in advance, because getting them wrong at the moment of sale can wipe out the tax benefit.

What Happens When the Term Ends

When your retained term runs out, the home has to leave the trust. The trustee signs a new deed transferring legal ownership to the remainder beneficiaries. From that point on, you no longer own or control the property.

If you want to keep living there, you need a written lease at fair market rent. This is where planners get emphatic: the IRS will pull the home’s full value back into your taxable estate if you stay without paying market rent. The rent should be set by an independent appraisal, and the lease has to look and function like an arm’s-length deal, because a sweetheart arrangement between parent and child is treated exactly as it sounds.

The leaseback carries a second planning benefit. Every rent check further reduces your taxable estate while moving cash to your beneficiaries. They report the rental income on their returns, but for families trying to shift wealth across generations, the ongoing cash transfer is part of the appeal, not just a compliance chore.

What Happens if You Die During the Term

The biggest risk in the whole structure is dying before the retained term ends. If that happens, the planning benefit disappears. The home’s full fair market value snaps back into your gross estate as if the QPRT had never existed.¹⁰ Section 2036 drives the result: because you kept the right to use the home during the term, the IRS treats the property as still yours at death.

There are two softening points. The original discounted gift you reported on Form 709 doesn’t get taxed twice; the amount comes out of your adjusted taxable gifts so the estate tax calculation doesn’t double-count it. And because the home ends up back in your gross estate, your heirs receive a stepped-up basis equal to the home’s fair market value at death.¹¹ That step-up erases the built-in capital gain, so if they sell, they owe little or no capital gains tax on the appreciation that built up during your lifetime.

The Carryover-Basis Catch When It Works

When the QPRT works as intended and you outlive the term, there’s a tax cost many families don’t see coming. Because the transfer is a completed gift, your beneficiaries inherit your original cost basis instead of a stepped-up one. In tax terms, they take a carryover basis equal to what you paid for the property plus the cost of any improvements.

That matters when the home is eventually sold. Suppose you bought the property for $400,000, put $100,000 into renovations, and the home is worth $4 million when your beneficiaries sell. They face capital gains tax on $3.5 million of gain. At federal capital gains rates of up to 20%, plus the 3.8% net investment income tax, the bill can easily exceed $800,000.

Whether the trade is still worth it depends on comparing that capital gains exposure against the estate tax savings. For a home that has appreciated heavily and would otherwise face a 40% estate tax rate, the estate tax savings generally dwarf the capital gains cost. For a home with modest appreciation, or an estate just barely over the exemption, the carryover basis can eat enough of the benefit that the math gets closer than people expect. Run the actual numbers before funding.

Transferring a Home With a Mortgage

A mortgage doesn’t disqualify a home from going into a QPRT.³ But the debt complicates the gift tax picture. When you transfer encumbered property, the outstanding loan balance counts as consideration received, so the initial taxable gift is calculated on the net equity rather than the gross value.

The complication shows up afterward. If you keep making mortgage payments on the trust’s behalf — which is typical, since you’re still living there — each payment is treated as another transfer to the trust. Those payments get the same retained-interest discount as the original gift, but they still eat into your exemption and could eventually trigger gift tax. For that reason, most planners suggest paying off the mortgage before funding the QPRT, or at least modeling the cumulative impact of years of ongoing payments.

Choosing the Term Length

The retained term is the single most consequential decision in the setup, because it controls both the size of the discount and the survival risk. A longer term produces a bigger discount, because beneficiaries wait longer and the present value of their future ownership shrinks. A longer term also means more years you need to live. Die one day short of the term and the full value lands back in your estate.

There’s no universal answer, but the practical range for most grantors runs between 10 and 20 years. Someone in their mid-50s with excellent health might pick a 15-year term to maximize the discount. Someone in their late 60s, or dealing with health concerns, might choose 8 to 10 years and accept a smaller discount in exchange for a better chance of outliving the trust.

Actuarial tables inform the analysis without settling it. A grantor with a terminal illness or very advanced age runs into two problems at once: the actuarial discount itself shrinks, and the risk of estate inclusion becomes prohibitive. At some point the numbers stop working, because the discount is too small to justify the complexity and the odds of the whole plan failing are too high. The QPRT fits best when you’re healthy enough that a meaningful term is realistic, the home has strong appreciation ahead of it, and your estate is large enough that the 40% rate represents serious money.¹

1
Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
2
Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
3
eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts
4
Internal Revenue Service. Revenue Procedure 2003-42 – Qualified Personal Residence Trust
5
Office of the Law Revision Counsel. 26 USC 2702 – Special Valuation Rules in Case of Transfers of Interests in Trusts
6
Internal Revenue Service. Section 7520 Interest Rates
7
Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts
8
Internal Revenue Service. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
9
Internal Revenue Service. Abusive Trust Tax Evasion Schemes – Questions and Answers
10
Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate
11
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent