Qualified Personal Residence Trust: Document, Term, and Form 709

A qualified personal residence trust has to satisfy a defined set of requirements to work: the property has to be a qualifying residence, the trust instrument has to contain specific provisions mandated by Treasury Regulations under Section 2702, you have to retain the right to live in the home for a fixed term set at funding, and you have to report the transfer on IRS Form 709 with the trust document and actuarial calculation attached. Miss any of these and the trust either fails as a QPRT or gets pulled back into your taxable estate.

Which Properties Qualify

The trust can hold only a personal residence. That means your principal home or one other property you actually use as a residence, such as a vacation home you personally occupy. A property whose primary function is generating rental income or running a business does not qualify. The regulations define a personal residence to include the home itself, structures used for residential purposes, and a reasonable amount of surrounding land given the home’s size and location. Condominiums, cooperative apartments, and fractional ownership interests all qualify.¹

You can create up to two QPRTs, one for a principal residence and one for a second residence, and each trust holds only one property. Furniture and other household furnishings cannot go into the trust even if they sit inside the home being transferred.¹

A mortgaged home is not disqualified, but the mortgage creates ongoing complications: each principal payment you contribute to the trust may be treated as an additional taxable gift requiring its own valuation and Form 709 filing, and cash contributed for payments is subject to strict limits described below. Paying the mortgage off before funding is the cleanest path.

What the Trust Document Must Contain

The trust instrument has to meet the structural requirements in the Treasury Regulations under Section 2702. The IRS published a sample QPRT in Revenue Procedure 2003-42 and has said it will recognize a trust as a valid QPRT if the instrument is substantially similar to that sample and the trust operates consistently with its terms.²

The core provisions the document needs:

A property restriction limiting trust holdings to the residence and insurance policies on that residence. No investment assets, no second property, no business interests.²
A cash-holding limit. The trustee may accept cash additions only in amounts needed for expenses expected within six months, improvements to be paid within six months, or a replacement residence to be purchased within three months.²
A fixed retained term. Your right to occupy the home must be a stated number of years established when you fund the trust, and it cannot be extended, shortened, or revoked after the fact.
A cessation clause. If the home stops being used as a personal residence, the trust must either distribute assets back to you or convert into a grantor retained annuity trust that pays you an annuity for the remaining term.²
An end-of-term distribution provision. When the retained term expires, the trustee must transfer the property outright to the beneficiaries or hold it in a separate trust for their benefit.

A document that falls short on any of these requirements can sometimes be fixed through judicial or nonjudicial reformation under state law, but that adds delay and cost.¹

Setting the Retained Term

The retained term is a required, one-time choice made at funding. The document has to state a specific number of years, and that period cannot be changed later. Two consequences follow from that.

First, term length drives the size of the taxable gift. A longer term produces a smaller reported gift because the beneficiaries wait longer to take possession, so more of the home’s value stays on your side of the ledger as a retained interest.

Second, if you die before the term expires, the home’s full fair market value at date of death gets pulled back into your gross estate as if the QPRT had never existed.³ The exclusion amount you used when reporting the original gift gets credited against the estate tax so you aren’t double-taxed, but the planning benefit is gone. That mortality risk is why the term selection has to weigh your age and health against the tax savings a longer term would produce. Someone in their mid-50s and good health might comfortably choose 15 years; someone in their early 70s usually picks something shorter.

Calculating the Reportable Gift

What you report to the IRS is not the full home value. It’s the actuarial value of the remainder interest, meaning the home’s fair market value minus the value of your right to occupy the property for the retained term. Three inputs drive the calculation: the appraised fair market value of the home, the length of your retained term, and the Section 7520 interest rate for the month you fund the trust.

The Section 7520 rate equals 120 percent of the federal midterm rate, compounded annually, rounded to the nearest two-tenths of one percent, and the IRS publishes it monthly.⁴⁵ A higher rate produces a larger retained-interest value and therefore a smaller taxable gift, which is why QPRT planning tends to look more attractive when rates are elevated.

The calculation has to use the IRS actuarial tables prescribed under Section 7520, and the home’s value has to be supported by a qualified appraisal. An inaccurate valuation invites audit scrutiny and potential penalties.

Filing Form 709

You must report the QPRT transfer on IRS Form 709, the United States Gift and Generation-Skipping Transfer Tax Return, for the calendar year you fund the trust.⁶ The return is due by April 15 of the following year. Form 8892 provides an automatic six-month extension if you need more time.⁷

Report the QPRT gift on Schedule A, Part 2, of Form 709, the section for gifts where the beneficiaries’ right to possession begins in the future. List the home’s full appraised value, then subtract the actuarial value of your retained term interest. The remainder is the taxable gift.

Two attachments are required. Include a complete copy of the executed trust instrument so the IRS can verify it meets the QPRT structural requirements. Attach the detailed actuarial calculation showing the appraised value, the Section 7520 rate used, the retained term, your age, and the specific factors from the IRS actuarial tables that produced the remainder interest value.

The taxable gift reduces your available lifetime exclusion. For 2026, the basic exclusion amount is $15 million per person.⁸ A QPRT that produces a $600,000 taxable gift drops your remaining exclusion to $14.4 million. The IRS tracks cumulative lifetime gifts through Form 709 filings, so accurate reporting matters for every future gift and for your eventual estate tax return.

Requirements During the Trust Term

While the retained term runs, you continue paying property taxes, homeowner’s insurance, and routine maintenance. These payments are not additional gifts because they’re your personal obligations as the occupant. The QPRT is treated as a grantor trust for income tax purposes, so trust income and deductions flow through to your individual return, and you can still deduct property taxes to the extent current law allows.¹

Capital improvements are treated differently. If you pay for a major renovation or addition, the IRS treats that payment as an additional taxable gift to the trust. The gift amount is discounted by the value of your retained interest for the remaining term, requires a new actuarial calculation using the Section 7520 rate in effect at the time, and gets reported on a new Form 709.

Cash contributions are tightly restricted regardless of purpose. The trustee can only accept cash within the six-month expense window, the six-month improvement window, or the three-month replacement-purchase window described in the trust document. Excess cash has to leave the trust.²

One local wrinkle to check before funding: some jurisdictions offer property tax or homestead exemptions that may no longer apply once the home is held in an irrevocable trust. Losing an exemption raises carrying costs for the entire term.

Sale and Replacement Rules

The trust can sell the residence during the term, but the timeline is fixed. After a sale, the trust can hold the proceeds for up to two years while shopping for a replacement residence, and QPRT status survives during that window.¹

If the trust buys a replacement home of equal or greater value before the earlier of two years or the end of the trust term, the QPRT continues as if nothing changed. If the replacement costs less than the sale proceeds, the QPRT continues for the new home, but the leftover cash must either be distributed to you or converted into a GRAT within 30 days.²

If the home is sold with no replacement, the trust loses QPRT status. All assets have to either return to you or the trust has to convert entirely into a GRAT for the remaining term. The same two-year window and same consequences apply if the home is damaged or destroyed.

Requirements After the Term Ends

When the retained term expires, ownership passes to the beneficiaries under the terms of the trust. Your right to live there is over. Continuing to occupy the home is allowed only if you pay fair market rent, and you and the beneficiaries should execute a formal lease agreement, ideally before the term expires, with the rent supported by an independent appraisal or comparable rental analysis.

This is where a technically valid QPRT can still fail. If you pay no rent or below-market rent, the IRS can argue you retained an economic interest in the property beyond the stated term and pull the full date-of-death value back into your taxable estate under Section 2036.⁹ Documented, market-rate rent is the safeguard against that outcome.

One further point on basis, because it affects whether meeting all these requirements is worth doing. Property that passes through a QPRT does not get a stepped-up basis at your death. The beneficiaries take your original cost basis, adjusted for improvements, so built-in appreciation stays taxable when they eventually sell. That capital gains exposure has to be weighed against the estate tax savings before you commit to an irrevocable transfer.

1
eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts
2
Internal Revenue Service. Rev. Proc. 2003-42 – Qualified Personal Residence Trust
3
eCFR. 26 CFR 20.2036-1 – Transfers with Retained Life Estate
4
Office of the Law Revision Counsel. 26 USC 7520 – Valuation Tables
5
Internal Revenue Service. Section 7520 Interest Rates
6
Internal Revenue Service. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
7
Internal Revenue Service. Instructions for Form 8892
8
Internal Revenue Service. What’s New – Estate and Gift Tax
9
Office of the Law Revision Counsel. 26 USC 2036 – Transfers with Retained Life Estate