Watch the full interview: The Tax-Free Home Sale Strategy Most CA Sellers Don’t Know (YouTube)
Quick Answer
A charitable remainder trust (CRT) lets you move a highly appreciated asset — including your home — into a tax-exempt trust before it sells. The trust sells with no capital gains tax due at sale, invests the full proceeds, and pays you income for life. When you and your spouse pass away, what’s left goes to the charities you choose. Certified Financial Planner Bob Birgen calls it “the best-kept secret hiding in plain sight.” It has been in the Internal Revenue Code since 1969.
What are California sellers up against tax-wise?
Bob, a CFP and former CPA with Merit Financial Advisors, laid out the rates he works with for California sellers:
| Type of gain | Combined federal + CA rate Bob cited |
|---|---|
| Regular capital gain (appreciation) | About 37% |
| Straight-line depreciation recapture (rental/commercial) | About 42% |
| Accelerated depreciation recapture (rental/commercial) | About 54% |
If you’re selling your primary residence, depreciation recapture doesn’t apply — so you’re “only” facing the roughly 37% rate on gain above your exclusion.
How does a charitable remainder trust work, step by step?
- Meet with your estate planning attorney to draft a CRT customized to your goals.
- Transfer the property (or part of it) from your name or living trust into the CRT. If your estate plan is in order, Bob says you’re mostly “changing hats” — from trustee of your living trust to trustee of your CRT.
- The trust sells the property. Because the trust is tax-exempt, no capital gains tax is due at sale.
- The trust invests the full proceeds and pays you (and your spouse) income for life.
- At the second death, the remaining balance goes to the charity or charities you’ve named.
You also get a charitable income-tax deduction up front for the present value of what charity will eventually receive. Bob explained it’s limited to 30% of adjusted gross income, with up to five more years to use any remainder.
What do the numbers look like?
Bob’s case study: a married couple, both 60, selling a $5 million home with a $250,000 cost basis. (He recommended first selling a slice outright to use the $500,000 married-couple home-sale exclusion tax-free, then running the rest through the CRT. These numbers show the CRT portion.)
| Regular taxable sale | With a CRT | |
|---|---|---|
| Capital gains tax at sale | About $1.8 million | $0 |
| Money left working for you | $3.2 million | $5 million |
| Annual after-tax income (Bob’s 4% assumption) | About $128,000 | About $200,000 ($180,000 after funding life insurance for the kids) |
| What the kids receive | About $1.9 million (after estate tax) | About $1.9 million (via life insurance) |
| What the government receives | About $3.1 million | $0 |
| What charity receives | $0 | About $5 million |
Bob’s assumptions: a 7% pre-tax return (about 4% after tax), and a taxable estate subject to a 40% estate tax. Your numbers will differ — that’s why he runs a custom projection for each client.
His line that stuck with me: if you sell the normal way and send $3.1 million to the government, “you’re being very charitably inclined. It’s just a charity of the government’s choice.”
What if I want my kids to inherit too?
Bob says clients usually react one of three ways. Some are fine with that slice going to charity. Some like disinheriting the IRS more than they like the alternative. And the rest say, “I hate paying taxes, but I don’t hate my kids.”
For that last group, part of the extra income each year is gifted to a separate irrevocable trust that buys life insurance on both spouses. In his example, the policy is sized so the kids receive about the same $1.9 million they’d have gotten anyway — income-tax and estate-tax free. Another popular option: name a donor-advised fund your kids direct, so they decide which causes benefit.
Can I keep some cash to buy my next home?
Yes. This is the scenario I see most with downsizers. Bob’s strong recommendation for a primary residence is to calculate what percentage to sell outright so you fully use your $250,000 / $500,000 exclusion (if you’ve lived there two of the last five years). That portion comes to you tax-free to buy your next place — a condo, or a home in a lower-cost state — and the rest goes through the CRT. Bob added that if you still need a modest mortgage, the trust’s income can help you qualify, depending on the lender.
Is the income guaranteed?
No — and Bob was direct about that. The payout is a fixed percentage of the trust’s value each year, so it rises and falls with the investments. Key points from the interview:
- You stay in control. You’re the trustee and can hire or fire the investment manager.
- Typical mix: his most common client portfolio is about 70% stocks / 30% bonds, built for a lifetime time horizon.
- The “spigot” option: some trusts let you leave payments turned off for years — letting money compound tax-free — and turn them on at retirement, including catching up on prior years.
- Taxes on payouts: distributions keep the character of what the trust earned — Bob’s shorthand is “worst in, first out” — so most payouts end up taxed as ordinary income first, then capital gain.
Who is a CRT NOT right for?
- People who plan to stay in the home for life. At death, heirs get a step-up in basis that can wipe out the gain anyway. Bob agreed: in that case, stay and keep the step-up.
- Younger owners. At least 10% of the value must be projected to go to charity. Bob said that rule generally rules out singles under about 27–28 and married couples under about 38–39.
- Anyone who needs a large lump sum later. You can’t reach in and pull out a big chunk of principal at once.
Does it only work for houses?
No. Bob described a construction contractor who had never given more than $1,000 to charity. They set up a $12 million CRT for a corporation he was winding down — and in the process, “turned a guy who was not charitably inclined into a philanthropist.” CRTs can work for primary residences, rentals, commercial property, businesses, and other appreciated assets. Bob said he’s not a big fan of Delaware Statutory Trusts as a 1031 alternative because you stay 100% in real estate with less control and diversification.
For another way to spread out a capital gain, see my interview on structured installment sales. If you inherited the property, start with my guide to capital gains on inherited property.
Frequently Asked Questions
What is a charitable remainder trust?
An irrevocable, tax-exempt trust that sells your appreciated asset without capital gains tax at sale, pays you income for life, and leaves the remainder to charities you choose.
Can I put my primary residence in a charitable remainder trust?
Yes. Bob recommends selling part outright first to use your $250,000/$500,000 home-sale exclusion, then putting the rest in the CRT.
Do I avoid capital gains tax completely?
No tax is due when the trust sells. Distributions you receive later are taxed based on what the trust earned, generally ordinary income first and then capital gain.
Do I get a tax deduction?
Yes — a charitable deduction for the present value of the remainder going to charity. Bob said it’s limited to 30% of adjusted gross income, with up to five additional years to use it.
Can I change the charity later?
Yes. Bob said you can change charities at any time and split the remainder among several. You don’t have to name one when you set up the trust.
Will my kids get nothing?
Not necessarily. Many clients use part of the extra income to fund life insurance in a separate trust so their children inherit a similar amount, or name a donor-advised fund the kids control.
Is the income guaranteed?
No. It’s a fixed percentage of the trust’s value each year, so it varies with investment performance — which also gives some protection against inflation over time.
Is there an age requirement?
Effectively, yes. At least 10% must be projected to go to charity. Bob said that usually rules out individuals under about 27–28 and couples under about 38–39.
How is a CRT different from a 1031 exchange?
A 1031 exchange only works for investment or business real estate and only defers the gain into another property. A CRT works for a primary residence and many other assets, and no tax is due when the trust sells.
Who sets this up?
An estate planning attorney drafts the trust and a financial planner like Bob runs the numbers. As your agent, I coordinate the sale timing with them so the property is in the trust before you go under contract.
Guest
Bob Birgen, CFP (former CPA), Merit Financial Advisors — 909-860-9992, ext. 22.
Disclaimer: This article summarizes an interview for general educational purposes. Will Flannigan is a licensed California real estate agent, not a tax advisor, financial planner, or practicing attorney, and nothing here is legal, tax, or financial advice. Figures are examples and opinions shared by the guest and may not apply to your situation or reflect current law. Consult a qualified attorney, CPA, or financial professional before acting.
About Will Flannigan
Will Flannigan is a Certified Trust & Probate Specialist (CTPS) with The Nell Team at Equity Union Real Estate, representing buyers and sellers across Burbank, Glendale, Pasadena, and greater Los Angeles since 2014. A former attorney who later led a nine-agent sales team as Sales Manager at Keller Williams Burbank, Will specializes in trust and probate sales, equestrian properties in the Burbank Rancho, and helping homeowners downsize — and serves Mandarin-speaking clients in fluent Mandarin. He hosts “The Fine Print,” an interview series connecting homeowners with attorneys and financial professionals.
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Will Flannigan · DRE #01951292 · The Nell Team at Equity Union Real Estate