A Qualified Personal Residence Trust, or QPRT, is an irrevocable trust that moves your home out of your taxable estate at a steep gift-tax discount. You transfer title to the trust, keep the right to live in the home rent-free for a fixed number of years, and when that term ends, ownership passes to your chosen beneficiaries. The federal estate tax exemption for 2026 is $15 million per individual after Congress raised the threshold through the One, Big, Beautiful Bill Act, so a QPRT delivers its biggest payoff for homeowners whose estates approach or exceed that line, especially those holding real estate in markets where continued appreciation could create a future tax problem.1Internal Revenue Service. Whats New – Estate and Gift Tax
How the Trust Works
Creating a QPRT splits your home’s ownership into two legal interests. Your retained interest is the right to live in the residence rent-free for a specific term of years that you select when the trust is drafted. The remainder interest is your beneficiaries’ right to own the property once that term expires.
The IRS treats the transfer of the remainder interest as a completed gift when you fund the trust, reported on Form 709. Because your beneficiaries cannot use or sell the property until years later, the taxable gift is worth far less than the home’s current market value. The value of your retained interest is subtracted from the home’s fair market value, leaving a discounted amount that counts against your lifetime exemption.2eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts
Any appreciation the home experiences after the transfer date happens entirely outside your estate. That is the core benefit. You lock in the home’s taxable value on the day you create the trust, and every dollar of growth from that point forward belongs to your beneficiaries free of estate tax.
What Property Qualifies
The Treasury Regulations restrict QPRTs to personal residences. Your home qualifies if it is your principal residence or one other residence you use personally, such as a vacation home. Surrounding land and any structures you use for residential purposes count as part of the residence; personal property like furniture does not.2eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts
The trust itself faces tight asset restrictions. Besides the home, it can hold only enough cash to cover property taxes, insurance, and maintenance, along with insurance policies on the residence. No investment accounts, no rental properties, no other financial assets.2eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts
You can create a maximum of two QPRTs, one for your primary home and one for a second residence. Fractional interests in the same property count as a single trust toward that cap.3eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts The trust document must also prohibit any sale or transfer of the residence back to you or your spouse, both during the retained term and afterward for as long as the trust remains a grantor trust. This restriction is a condition of QPRT qualification under the regulations.2eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts
How the Gift Tax Discount Is Calculated
The financial power of a QPRT comes from the gap between what the home is actually worth and what the IRS counts as the taxable gift. When you fund the trust, you report only the present value of the remainder interest, calculated using IRS actuarial tables and a monthly discount rate called the Section 7520 rate.4Office of the Law Revision Counsel. 26 U.S. Code 7520 – Valuation Tables That rate equals 120% of the federal midterm rate, rounded to the nearest two-tenths of a percent.5Internal Revenue Service. Actuarial Tables For the first four months of 2026, it has ranged from 4.6% to 4.8%.6Internal Revenue Service. Section 7520 Interest Rates
A higher Section 7520 rate works in your favor. It increases the calculated value of your retained interest, which shrinks the remainder interest that the IRS counts as the taxable gift. A longer retained term produces the same effect: the more years your beneficiaries must wait, the less their future ownership is worth in today’s dollars.
The calculation also factors in the statistical probability that you will die during the term. If that happens, the home returns to your estate, so the actuarial tables assign a value to that risk and subtract it from the gift as well. Older grantors see a larger discount for a given term length because the mortality probability is higher, which further deflates the remainder value.
To put rough numbers on it, a homeowner in their mid-60s transferring a $1.5 million home with a 12-year term at a 4.6% Section 7520 rate could report a taxable gift well under half the home’s fair market value. That discounted amount is what counts against the $15 million lifetime exemption, and every dollar of appreciation the home experiences over the 12-year term escapes estate taxation entirely.1Internal Revenue Service. Whats New – Estate and Gift Tax
Surviving the Term Versus Dying During It
Term length is the single most important variable in a QPRT, because the whole structure hinges on you outliving the term you chose.
If you survive, the strategy has worked. Ownership passes to your beneficiaries fully removed from your estate, including all the appreciation that accumulated during the term. If you want to keep living in the home afterward, and most people setting up a QPRT do, you need to sign a lease and pay fair market rent to the new owners. Getting a professional appraisal or broker opinion on the rental value before the term expires is standard practice. Paying below-market rent or skipping payments entirely risks the IRS pulling the home’s full value back into your estate under IRC Section 2036, which would undo the entire plan.7Office of the Law Revision Counsel. 26 U.S. Code 2036 – Transfers With Retained Life Estate The rent payments carry a secondary benefit: every check you write to your beneficiaries moves money out of your estate without triggering gift tax, because you are paying fair consideration for the right to live in the home.
If you die before the retained term expires, the full fair market value of the home at the date of death is pulled back into your gross estate as if the trust never existed. Because you held the right to live in the residence and that right had not expired by the time you died, IRC Section 2036 requires inclusion of the entire value.8eCFR. 26 CFR 20.2036-1 – Transfers With Retained Life Estate
The damage in that scenario is limited but real. The lifetime gift-tax exemption you used when funding the trust is effectively credited back through an adjustment in the estate tax calculation, so you are not taxed twice on the same property. And because the home is now included in your estate, it receives a stepped-up basis to its date-of-death value, which helps your heirs on capital gains if they sell. Still, a failed QPRT means your estate gained nothing from the exercise other than legal and appraisal costs for a trust that produced zero tax savings. A shorter term raises the odds you will survive but produces a smaller gift-tax discount. A longer term maximizes the discount but increases the probability of failure.
If the Home Is Sold During the Term
You are not locked into keeping the same home for the full term. If the residence is sold, the trust can hold the sale proceeds for up to two years while the trustee looks for a replacement. If a new home of equal or greater value is purchased within that window or before the term ends, whichever comes first, the QPRT continues as if nothing changed.2eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts
If the replacement home costs less than the sale proceeds, the QPRT keeps going for the new residence, but the leftover cash no longer qualifies as a QPRT asset. Within 30 days, that excess must either be distributed to you outright or converted into a grantor retained annuity trust (GRAT) for the remainder of the term.
If no replacement home is purchased at all, the entire trust loses its QPRT status. Everything must then be distributed back to you or converted into a GRAT. A GRAT conversion preserves some wealth-transfer potential, but the mechanics and tax implications differ substantially from the original QPRT. Anyone considering a QPRT for a home they might sell should make sure the trust document expressly permits holding sale proceeds; the regulations require it, but the provision must appear in the governing instrument.
The Carryover Basis Trade-Off
The tax consequence that catches people off guard is the income tax cost for beneficiaries. Because a QPRT transfers the home as a lifetime gift, your beneficiaries receive the property with your original cost basis, adjusted for improvements, rather than the home’s current market value.9Office of the Law Revision Counsel. 26 U.S. Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust When they eventually sell, they owe capital gains tax on the difference between your original purchase price and their sale price.
Property passing through your estate at death would instead receive a stepped-up basis to the date-of-death value, potentially wiping out decades of built-in gain. For a home that has tripled in value since you bought it, the capital gains tax your heirs face after a successful QPRT can be substantial, and it is a cost that would not exist if the home had simply stayed in your estate.
Whether the estate tax savings outweigh the capital gains cost depends on the specifics. Homes with a relatively high basis, purchased recently or substantially improved, tilt the math in favor of the QPRT. A family home bought decades ago at a fraction of today’s value creates a wider gap. In either case, the comparison runs the estate tax rate (40% on amounts above the exemption) against the long-term capital gains rate your beneficiaries would pay, factoring in state-level taxes on both sides. For estates well above the $15 million exemption, the estate tax savings almost always win. For estates closer to the line, the analysis is tighter and the carryover basis cost may eat into the benefit.