How Does a Qualified Personal Residence Trust (QPRT) Work?

A qualified personal residence trust, or QPRT, works by letting you deed your home into an irrevocable trust, keep living there rent-free for a fixed number of years, and then pass the home to your chosen beneficiaries at a gift tax value that’s far below what the home is actually worth. The strategy freezes the home’s value for gift and estate tax purposes on the day you fund the trust, so every dollar of future appreciation lands with your beneficiaries outside your taxable estate. For 2026, the lifetime gift and estate tax exemption is $15 million per person and the top federal estate tax rate is 40%, which is why QPRTs matter most to homeowners whose estates are approaching or already past that line.¹

The Three Phases of a QPRT

A QPRT runs on a timeline you set at the outset. There’s the funding, the retained term, and the handoff.

You start by transferring the deed to your home into the trust. The trust is irrevocable, meaning once it’s done, you cannot pull the property back or rewrite the terms.² You then live in the home for the “retained interest term,” a fixed number of years you choose when you create the trust. During that period life looks the same: you pay the mortgage, the property taxes, the insurance, and the maintenance just as before. Nothing about the day-to-day changes.

When the term ends, ownership passes to the beneficiaries named in the trust, usually your children directly or a continuing trust set up for their benefit. At that point your rent-free right to occupy the home is over.

Why the Gift Is Worth So Much Less Than the Home

The appeal of a QPRT comes down to one piece of math. The IRS doesn’t treat the gift as the full value of the house. Instead, it taxes only the “remainder interest” — the home’s present value minus the value of your right to live there for the trust term. Your beneficiaries have to wait years to actually get the property, and the IRS discounts the gift accordingly.

On a $2 million home, the remainder interest might come in at $600,000 or $700,000. That lower figure is what gets reported against your lifetime exemption, and everything the home appreciates to between the funding date and the end of the term passes to your beneficiaries without eating any more of that exemption.¹

Three variables drive how deep the discount runs:

The Section 7520 interest rate, published monthly by the IRS at 120% of the federal midterm rate. As of April 2026 that rate is 4.6%. Higher rates produce a bigger discount.³
Your age when you create the trust. The IRS uses actuarial tables to estimate your odds of surviving the term.⁴
The length of the retained term. A longer term pushes the beneficiaries’ receipt of the home further into the future, which lowers the present value of what they’re getting.

Put simply, the longer the wait and the higher the discount rate, the smaller the taxable gift.

Which Homes Can Go Into a QPRT

Only two types of property qualify: your principal residence and one additional residence you personally use. The second home counts if your personal use exceeds the greater of 14 days a year or 10% of the days it’s rented out.⁵ You can hold a maximum of two QPRTs at once, one per qualifying residence.⁶

The trust can hold the house, structures used as part of the home like a detached garage or pool house, and a reasonable amount of surrounding land for the property’s size and location. Furniture, artwork, and other personal property cannot go in. A home office is fine as long as the residential use dominates, but a property run primarily as transient lodging with substantial services, like a bed and breakfast, doesn’t qualify.⁶

You Have to Outlive the Term

This is the single condition the whole strategy rests on. If you die before the retained term ends, the home is pulled back into your gross estate at its full fair market value as of the date of death, as if the trust had never existed.⁷ The IRS regulations spell this out directly in an example involving a grantor who sets up a QPRT, keeps the right to live there for a fixed term, and dies before it ends.⁸

You don’t permanently lose the gift tax exemption you used when funding the trust; that gets restored. But the legal fees, appraisal, and setup costs become sunk expenses with nothing to show for them. That risk is why most planners steer away from QPRTs for grantors in poor health or at ages where the actuarial odds tilt the wrong way.

What You Have to Do After the Term Ends

Once the term is over, you no longer have any legal right to be in the house. The beneficiaries own it. If you want to keep living there, you must sign a lease with them and pay fair market rent.

This isn’t a technicality. The IRS treats continued occupancy without market-rate rent as the kind of retained interest that drags the whole property back into your taxable estate under Section 2036, which wipes out the reason you set the trust up.⁷ The usual practice is to get a rental appraisal and have a written lease in place before the term expires, with rent set at what a comparable property in the area would command.

There’s an upside to this. The rent you pay your beneficiaries is itself a transfer of wealth to them, and it doesn’t use any of your gift tax exemption. If the receiving trust is a grantor trust as to you, the rental income is disregarded for income tax purposes, so no one reports the rent as income and no one claims a rental deduction.

The Basis Trade-Off That Catches People Off Guard

A QPRT buys estate tax savings at the cost of a stepped-up basis. When property passes to heirs at death outside a trust like this, they generally take a basis equal to the home’s fair market value, which erases unrealized gains. Property that passes through a successful QPRT doesn’t get that step-up. Your beneficiaries inherit your original cost basis.

If you bought the home for $400,000 and it’s worth $2 million when the term ends, your children’s basis is $400,000. A later sale at $2.5 million produces roughly $2.1 million in taxable capital gains. For a home that has appreciated hard and that the beneficiaries plan to sell soon after inheriting, the capital gains tax can eat a serious portion of the estate tax savings. Whether a QPRT comes out ahead depends on how long the beneficiaries intend to hold the property and how big the estate tax exposure is to begin with.

During the retained term itself, the QPRT is a grantor trust for income tax purposes. If the home is sold while you’re still living in it under the trust, you can use the Section 121 exclusion to shelter up to $250,000 of gain ($500,000 for married couples filing jointly).

Choosing the Length of the Term

The term length is the most consequential decision in a QPRT, and it pulls in two directions. A longer term produces a bigger gift tax discount because the remainder interest is worth less today. A longer term also raises the chance you die before it ends and the whole thing collapses.

Most planners work in a range of 10 to 15 years for grantors in their 50s and 60s. Shorter terms of 5 to 8 years are more common for older grantors where mortality risk weighs heavier. Splitting a home across two separate QPRTs with staggered terms is another approach: if you die partway through, the one with the shorter term may already have completed.

The Section 7520 rate feeds into this too. At 4.6%, QPRTs produce meaningful discounts, especially for younger grantors willing to commit to longer terms.³ When rates climb, the discount gets deeper.

What Setting One Up Involves

You need a professional appraisal of the property as of the funding date, done under the Uniform Standards of Professional Appraisal Practice so the number holds up if the IRS pushes back. That appraisal is the baseline figure feeding the remainder interest calculation.

The trust document itself has to meet the requirements of Treasury Regulation 25.2702-5(c), name the grantor, trustee, and beneficiaries, specify the exact term, and include contingency provisions for premature death, sale of the home, and loss of residence status.⁶ The IRS published a sample QPRT document in Revenue Procedure 2003-42 that many attorneys use as a template.⁹ Once the instrument is signed, a new deed conveying the property to the trust gets recorded with the local county recorder.

You report the discounted remainder interest on IRS Form 709, the gift tax return, by April 15 of the year after the transfer.¹⁰

If the home has a mortgage, transferring it into an irrevocable trust can trigger a due-on-sale concern. The Garn-St. Germain Act exempts transfers into a trust where the borrower stays a beneficiary and keeps occupancy rights, which fits a QPRT during the retained term.¹¹ The protection is less airtight for irrevocable trusts than revocable ones, so notifying the lender ahead of time is a common precaution.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
Office of the Law Revision Counsel. 26 USC 2702 – Special Valuation Rules in Case of Transfers of Interests in Trusts
3
Internal Revenue Service. Section 7520 Interest Rates
4
Internal Revenue Service. Actuarial Tables
5
Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home
6
eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts
7
Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate
8
eCFR. 26 CFR 20.2036-1 – Transfers With Retained Life Estate
9
Internal Revenue Service. Rev. Proc. 2003-42
10
Internal Revenue Service. Instructions for Form 709 (2025)
11
Office of the Law Revision Counsel. 12 USC 1701j-3 – Preemption of Due-on-Sale Prohibitions