Putting Your House into a Charitable Remainder Trust: How It Works and What to Watch For

Quick Summary

• You can place a primary residence or investment property into a charitable remainder trust (CRT) as long as the deed is transferred correctly.
• CRT funding with real estate avoids immediate capital‑gains tax, gives an income‑tax deduction, and can reduce estate tax.
• Two common CRT structures for a house are the Charitable Remainder Unitrust (CRUT) and the Charitable Remainder Annuity Trust (CRAT); each handles payouts differently.
• Key steps include getting a qualified appraisal, selecting a qualified charitable organization, filing IRS Form 5227, and clearing any mortgage liens.
• Beware of valuation challenges, donor‑beneficiary payout limits, and state‑level recording requirements.

Ever wondered if you could keep living in your home while also supporting a cause you love? A Charitable Remainder Trust is a legal vehicle that lets you transfer ownership of a house to a trust, receive income for life (or a term of years), and ultimately pass the property to a charity. It sounds like a win‑win, but the mechanics can be tricky. This guide walks you through the entire process-legal eligibility, tax benefits, the paperwork you’ll need, and the common pitfalls that trip up donors.

Understanding a Charitable Remainder Trust

At its core, a CRT is an irrevocable trust that splits ownership between you (the donor) and a charity. You move assets-cash, securities, or real estate-into the trust. The trust then pays you a fixed percentage of its value (CRUT) or a fixed dollar amount (CRAT) every year. When you die or the term ends, the remaining assets go to the charity you chose.

Because the trust is irrevocable, the IRS treats the transferred assets as a completed gift for estate‑tax purposes. The donor also gets a charitable income‑tax deduction based on the present value of the remainder interest that will eventually go to the charity.

The trust must satisfy three IRS requirements:

1. It must be organized as a trust under state law.
2. It must have one or more qualifying charities as the remainder beneficiaries.
3. It must pay a minimum 5% of the trust’s annual fair market value to the income beneficiaries.

Those rules apply whether you’re funding the CRT with cash or a house.

Can You Put a House in a Charitable Remainder Trust?

Yes-you can place most types of real estate into a CRT, including a primary residence, vacation home, rental property, or commercial building. The IRS doesn’t restrict the asset class; it cares that the property is properly titled in the trust’s name and that the trust qualifies under the three rules above.

There are a few practical constraints to watch:

• Liquidity: The trust must generate enough cash each year to meet the required payout. If the house is illiquid or generates little rental income, the trustee may need to sell it.
• Mortgage: Any outstanding mortgage stays attached to the property. The trust must either assume the loan or pay it off, which can affect payout calculations.
• Title transfer: The deed must be transferred from your name to the trust. This step triggers a possible property‑transfer tax in some states.

Assuming you can address those points, a house can be an excellent CRT asset because its appreciation potential creates a larger charitable remainder while still providing you with income.

Step‑by‑Step: Funding a CRT with Real Estate

Here’s a practical checklist you can follow:

1. Choose a qualified charitable organization. The IRS requires a 501(c)(3) or similar public charity. The charity will receive the remainder interest when the trust terminates.
2. Select the CRT type. A Charitable Remainder Unitrust (CRUT) pays a percentage of the trust’s yearly value, while a Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount.
3. Obtain a qualified appraisal. The IRS requires a “qualified appraisal” for non‑cash assets over $5,000. This appraisal sets the initial fair market value (FMV) used for payout calculations and the charitable deduction.
4. Draft the trust agreement. Work with an estate‑planning attorney to outline payout percentages, term length, trustee powers, and the remainder beneficiary.
5. Transfer the deed. Record a new deed that names the trust as the owner. If there’s a mortgage, get lender approval or refinance under the trust’s name.
6. File IRS Form 5227. The trustee must file this form annually, reporting assets, income, and distributions.
7. Notify the charity. Provide the charity with the trust’s EIN and a copy of the trust agreement so they can claim their future remainder.

Each step involves paperwork, but the tax payoff can be substantial. A qualified appraisal is often the most expensive part, typically $500‑$1,500 for a single‑family home.

Tax Benefits and Potential Pitfalls

Putting a house in a CRT offers three main tax advantages:

• Immediate income‑tax deduction: You deduct the present value of the charitable remainder, calculated using IRS tables (Section7520). The deduction can offset other taxable income in the year of the transfer.
• Deferral of capital‑gains tax: When the trust later sells the house, the capital gain is taxed at the trust level, which often pays a lower rate than an individual. In many cases, the trust’s tax bracket is the 15% or 20% capital‑gains rate.
• Estate‑tax reduction: Because the house is removed from your taxable estate, any appreciation after the transfer is not subject to estate tax.

But there are downsides you need to keep in mind:

1. Valuation risk: If the appraisal is too high, the IRS may challenge the charitable deduction, leading to penalties.
2. Payout limits: The IRS caps the charitable deduction at 30% of your adjusted gross income (AGI) for CRUTs or 50% for CRATs. Excess deduction can be carried forward five years.
3. Trust administration costs: Trustee fees, accounting, and filing Form 5227 can eat into the trust’s income.
4. Future flexibility: Once the house is in the trust, you can’t reverse the transfer or change the charity without court approval.

Balancing these pros and cons with a qualified tax advisor is essential before you sign on the dotted line.

Choosing the Right CRT Structure for a House

Below is a side‑by‑side look at the two most common CRT formats when the funded asset is real estate.

For a house that you expect to appreciate, a CRUT often yields a larger charitable remainder because the payout climbs with the rising FMV. If you prefer predictable income and want a higher immediate deduction, a CRAT may be the better fit.

Common Mistakes and a Quick Checklist

Even seasoned donors slip up. Use this checklist before you hand over the deed:

• ✅ Verify the charity’s 501(c)(3) status and confirm they accept remainder interests.
• ✅ Obtain a qualified appraisal from a certified appraiser familiar with trust valuations.
• ✅ Ensure any mortgage is either assumed by the trust or paid off; otherwise, the trustee may need to sell the property.
• ✅ Choose a trustee with real‑estate experience-bank trustees, trust companies, or professional fiduciaries work well.
• ✅ Review the payout percentage against your cash‑flow needs; a 5% payout on a $500,000 house yields $25,000/year, which may be insufficient for living expenses.
• ✅ File Form 5227 annually and keep detailed records of all trust activities.
• ✅ Plan for state recording fees and potential transfer taxes.

Crossing each of these boxes dramatically lowers the chance of a surprise tax bill or a forced sale.

Alternatives to a CRT for Donating a House

If a CRT feels too complex, consider these other strategies:

• Direct charitable deed transfer. You can deed the house straight to a charity. You get a charitable deduction based on FMV, but you forfeit any future appreciation and lose the ability to receive income.
• Qualified Personal Residence Trust (QPRT). You transfer the house into a QPRT, retain the right to live there for a term, and later the house passes to heirs with reduced estate tax. This doesn’t create a charitable remainder but can be combined with a later charitable donation.
• Sell and donate the cash. You sell the house, then donate the proceeds. You pay capital gains tax on the sale, but you retain full control over the timing and amount of the charitable gift.

Each option has its own tax profile. A CRT shines when you want ongoing income, want to avoid immediate capital‑gains tax, and care about a lasting charitable impact.

Next Steps and Troubleshooting

Ready to move forward? Here’s a short roadmap:

1. Meet with an estate‑planning attorney who has CRT experience.
2. Select a charity you’re passionate about (local shelter, medical research, etc.).
3. Get a qualified appraisal and decide on CRUT vs. CRAT.
4. Draft and sign the trust agreement, then record the deed.
5. Set up a schedule for annual Form 5227 filings and trustee meetings.

If you hit a snag-like a lender refusing to release the mortgage-consider a short‑term loan to bridge the gap, or explore a partial‑sale/tax‑swap strategy with a qualified intermediary.