Qualified Personal Residence Trust
§2702 Residence Interest

How a QPRT works

A qualified personal residence trust (QPRT) is an irrevocable trust in which the grantor transfers a personal residence and retains the right to use it for a specified term of years. At the end of the term, the residence passes to the remainder beneficiaries, typically the grantor’s children. The gift tax value of the remainder interest is the fair market value of the residence minus the present value of the grantor’s retained use, producing a discounted gift.

The QPRT is authorized by §2702(a)(3)(A)(ii) as a “qualified interest,” an exception to the general rule under §2702 that retained interests in transfers to family members are valued at zero. Because the retained interest qualifies, it reduces the taxable gift dollar for dollar.

What qualifies as a personal residence

Under Treas. Reg. §25.2702-5(c), a personal residence includes:

• The grantor’s principal residence
• One other residence (vacation home, second home) that the grantor uses as a personal residence
• An undivided fractional interest in either
• Appurtenant structures and adjacent land reasonably appropriate for residential use

A taxpayer may have up to two QPRTs: one for the principal residence and one for a second residence. A residence used primarily for rental or business purposes does not qualify. If the residence includes a portion used for business (e.g., a home office), only the personal-use portion qualifies unless the business use is less than the de minimis threshold.

Gift tax valuation

The taxable gift is the FMV of the residence minus the present value of the retained term interest, calculated under §7520 using:

• The grantor’s age at the time of transfer: older grantor = higher retained interest value = smaller gift
• The term of the trust: longer term = higher retained interest value = smaller gift
• The §7520 rate: higher rate = higher retained interest value = smaller gift (QPRTs benefit from higher rates, unlike GRATs)

The gift is reported on Form 709 in the year of funding. The grantor can elect the §7520 rate for the month of transfer or either of the two preceding months.

Note the inverse relationship with GRATs: a higher §7520 rate produces a smaller taxable gift for a QPRT (because the retained use is worth more) but a larger gift for a GRAT (because the retained annuity is worth less). When rates are high, QPRTs are relatively more attractive; when rates are low, GRATs are.

Mortality risk - §2036 inclusion

If the grantor dies during the QPRT term, the entire fair market value of the residence is included in the grantor’s gross estate under §2036(a)(1). The transfer is treated as if it never occurred for estate tax purposes. The gift tax paid or exemption used at funding is credited back, but the estate tax benefit is entirely lost.

This is the central risk of a QPRT. Term selection balances two competing considerations:

• A longer term produces a smaller gift (better discount) but increases the probability of dying during the term
• A shorter term is safer but produces a larger gift and less transfer tax savings

Actuarial life expectancy drives the analysis. The grantor must be in reasonably good health at the time of funding; if the grantor is terminally ill, the IRS may challenge the transfer under §2036 or §2035.

Post-term occupancy and rent

When the QPRT term ends, the grantor’s right to use the residence expires. The grantor has two options:

• Move out: the remainder beneficiaries take possession (or continue to hold the property in trust for their benefit)
• Stay and pay fair market rent: the grantor leases the residence from the remainder beneficiaries (or the continuing trust) at fair market rent under a bona fide lease

The rent payments are themselves a transfer tax benefit: the grantor is paying rent from their estate to the beneficiaries, further reducing the taxable estate without using any gift tax exemption (it is not a gift; it is payment for use). The lease must be at fair market value and on arm’s-length terms.

If the grantor continues to live in the residence without paying fair rent, the IRS will argue that the residence should be included in the estate under §2036, defeating the purpose of the QPRT entirely.

Sale of the residence during the term

If the residence is sold during the QPRT term, the trust instrument must address the disposition of proceeds. Under Treas. Reg. §25.2702-5(c)(9):

• The trustee must reinvest the proceeds in a replacement personal residence within two years of the sale
• If no replacement is purchased within two years, the trust ceases to be a QPRT and converts to a grantor retained annuity trust (GRAT); the remaining term pays out as an annuity to the grantor based on the proceeds
• During the two-year reinvestment window, the proceeds may be held in a separate account and are not treated as trust corpus for QPRT purposes

This flexibility allows the grantor to sell and buy a replacement home, but it requires careful tracking and documentation. The replacement residence must qualify as a personal residence under the same rules.

Trust administration during the term

• Insurance: the trustee should maintain adequate property insurance on the residence. The trust instrument typically addresses whether the grantor or the trust pays premiums
• Property taxes: the grantor typically pays property taxes during the term as part of the retained use. Payment by the grantor is not a gift
• Maintenance and repairs: ordinary maintenance is typically the grantor’s responsibility during the term. Capital improvements increase the value passing to the remainder beneficiaries
• Income tax: the QPRT is a grantor trust during the term. All income (if any) is reported on the grantor’s 1040. In practice, a QPRT holding only a personal residence generates little or no taxable income unless the residence is partially rented

What we need to open a matter

• Trust instrument: the QPRT agreement, including term, remainder provisions, and sale/reinvestment clauses
• Property description and appraisal: FMV at the time of funding
• Grantor’s age and date of transfer
• §7520 rate elected
• Form 709 from year of funding: the original gift tax return reporting the transfer
• Current property status: still held, sold, or replaced
• Post-term lease agreement (if applicable): terms, rent amount, payment history
• Trust EIN: or we can apply (EIN application service)

Related services