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What Trustees Need to Know About Taxes When Selling Property for a Minor

UUnknown

2026-02-24

11 min read

Essential 2026 tax guidance for trustees selling trust-owned real estate for a minor—capital gains, 1041/K-1 reporting, trust accounting, and plain steps to follow.

When you must sell a trust-owned home for a minor: taxes you can’t ignore

If you’re a trustee selling trust-owned real estate on behalf of a minor, you’re not just negotiating price and repairs — you’re managing tax risk that directly affects the child’s inheritance. Sell too fast without the right accounting or miss a reporting form and the tax bill can shrink proceeds, create penalties, or trigger audits. This guide gives plain-language steps trustees can use in 2026 to report capital gains, handle trust accounting, and protect the beneficiary.

Top takeaways (read first)

Trust tax vs. beneficiary tax: The trust often files Form 1041; beneficiaries report amounts on Schedule K-1. Who actually pays the tax depends on trust type and whether gains are distributed in accordance with Distributable Net Income (DNI).
Forms to expect: Form 1041 (trust return), Schedule K-1 (beneficiary allocation), and Form 1099-S (sale of real estate) are the essentials — plus state returns and possible estimated payments.
Basis matters: Calculate the trust’s adjusted basis (original cost + improvements) before computing capital gain. For trusts created after a death, a stepped-up basis may apply—confirm with counsel.
Act now: Maintain clean trust accounting entries, decide whether gains will be taxed to the trust or flow through to the minor, and consult tax counsel early — IRS enforcement on real-estate reporting increased in 2025–2026.

Why 2026 is different: trends trustees must know

Two recent developments change how trustees approach real estate sales:

Increased IRS scrutiny: From late 2024 through 2026 federal enforcement activity focused on underreported real-estate gains and fiduciary returns. Courts and the IRS are paying closer attention to trust accounting and whether trustees properly report and distribute gains.
Better data matching and 1099 reporting: Title companies, settlement agents, and brokers increasingly feed standardized 1099-S and other information to IRS systems, making mismatches between trust returns and closing reports more likely to trigger inquiries.

Step 1 — Confirm your authority and the trust type

Your first job is administrative but essential. Before any tax work, confirm you have written authority to sell and to distribute proceeds.

Read the trust document: Is it a simple trust (must distribute income), a complex trust (may retain income and may distribute principal), or a grantor trust (grantor reports tax)?
Check any provisions about capital gains or mandatory distributions to the minor — these can change tax results.
If terms are unclear, get a court order or written instruction from a legal advisor to avoid later liability.

Step 2 — Calculate gain correctly (plain language)

Capital gain = Sale proceeds (net of selling costs) − Adjusted basis. Keep this simple and document everything.

Sale proceeds: Gross sale price minus closing costs such as commissions, title fees, and prorations.
Adjusted basis: Usually what the trust paid plus documented improvements and less allowable depreciation. If the property passed through a decedent’s estate, the trust may have a stepped-up basis. Verify with estate records.
Net capital gain: The amount left after subtracting adjusted basis and selling costs from the sale proceeds.

Example (simple)

Trust bought a house for $100,000, made $20,000 of documented improvements, and sold it in 2026 for $300,000 with $20,000 in selling costs. Adjusted basis = $120,000. Gain = $300,000 − $20,000 − $120,000 = $160,000.

Step 3 — Who reports what: Forms and timing

Trusts and beneficiaries use different forms. Make sure the right forms are filed on time.

Form 1099-S: Settlement agents usually issue this to report gross proceeds from real-estate sales to the IRS. Keep a copy for the trust file and confirm the trust’s Tax ID (EIN) is used if the trust is the seller.
Form 1041 (U.S. Income Tax Return for Estates and Trusts): The trust files this to report income, deductions, and capital gains generated during the tax year.
Schedule K-1 (Form 1041): If the trust distributes taxable items to beneficiaries, the trust should issue a K-1 showing each beneficiary’s share of DNI and capital items. Beneficiaries use K-1 to report income on their returns.
Beneficiary returns: The minor’s tax return will reflect income reported on K-1. If the beneficiary is a dependent minor, kiddie tax rules may apply and could tax unearned income at the parent’s rate.

Step 4 — Trust accounting and why it affects the minor

Trust accounting entries determine whether gains are treated as trust income or principal. That classification affects who pays taxes.

Principal vs. income: Sale proceeds of a capital asset ordinarily are principal. But whether capital gain is taxed to beneficiaries depends on DNI rules and how the trust instrument allocates gains.
Distributable Net Income (DNI): DNI defines the maximum deductible amount that can be passed through to beneficiaries. If capital gains are included in DNI (because the trust instrument requires it or an election is made), the beneficiary may receive a K-1 and pay tax on their share.
Trust tax brackets: Trusts reach high tax rates at much lower income levels than individuals. Retaining the gain in the trust often leads to higher tax rates than distributing it to beneficiaries.

If your goal is to maximize the minor’s after-tax inheritance, good trust accounting — plus timely tax counsel — can save thousands.

Step 5 — Kiddie tax and minor beneficiaries

When a minor beneficiary receives unearned income (like capital gains passed through), the kiddie tax may apply. That rule taxes a child’s unearned income above a threshold at the parents’ marginal tax rate in many cases.

Do not ignore parental tax returns — the kiddie tax calculation often uses the parents’ top rate.
Thresholds are adjusted annually for inflation; check 2026 figures or consult tax counsel.
In some cases, distributing proceeds as principal (rather than income) or timing distributions can reduce kiddie-tax exposure. Ask your attorney whether these options fit your fiduciary duties.

Step 6 — Estimated taxes and timing

If the trust or beneficiary will owe tax, consider estimated tax payments to avoid penalties.

Trusts may need to make estimated quarterly tax payments if their tax liability will exceed the safe harbor.
Beneficiaries who receive K-1s late in the tax year may need to make estimated payments based on expected K-1 income.
Coordinate with your CPA or tax counsel before the sale closes to plan estimated payments.

Step 7 — State taxes, local taxes, and other reporting

State and local tax rules vary widely. Many states tax capital gains as ordinary income and require trust returns. Additionally:

Check state filing requirements for trusts and beneficiaries.
Confirm any local transfer taxes, recording fees, or real-estate excise taxes due at closing; these affect net proceeds.
Be aware of nonresident tax withholding rules if either seller or beneficiary lives in a different state.

Advanced planning and strategies (what trustees can consider in 2026)

Some options may be available depending on the trust instrument and the facts of the sale. Always run these through legal and tax counsel.

Timing distributions: If distributing proceeds in separate years keeps beneficiaries in lower brackets or avoids kiddie tax thresholds, stagger distributions where you have discretion.
Including capital gains in DNI: In limited cases the trustee can arrange to have capital gains treated as distributable for tax purposes. That moves tax out of the trust into beneficiaries’ returns — helpful if the beneficiary’s rate is lower.
1031-like strategies: If the real estate qualifies as business or investment property, a like-kind exchange (where allowed) can defer gains. This is complex and less common for trusts; seek counsel early.
Installment sale: Spreading payments over multiple years can spread capital gains recognition and potentially reduce tax owed in any single year, but interest and credit risk must be factored.

Practical checklist for trustees selling trust real estate for a minor

Confirm authority to sell and document trustee decisions in the trust file.
Obtain a professional appraisal if basis or fair market value is unclear.
Collect closing documents and verify who the settlement agent will report to the IRS (confirm EIN vs. SSN).
Calculate adjusted basis and expected capital gain; document all improvements and expenses.
Consult tax counsel to determine whether gains should remain in trust or be distributed and how DNI rules apply.
Plan for estimated tax payments for the trust and the beneficiary, and confirm filing deadlines for Form 1041.
Prepare trust accounting entries showing receipts, distributions, and allocations between income and principal.
Issue Schedule K-1 timely if distributing taxable amounts and ensure the beneficiary (or parents) understand filing obligations.
Retain records for at least seven years: sale contract, closing statement, invoices for improvements, board minutes, and tax workpapers.

Common pitfalls trustees make — and how to avoid them

Using the wrong taxpayer ID at closing: If the trust’s EIN is not used, the IRS may issue a 1099-S to the wrong person. Confirm EIN with the title company before closing.
Misclassifying distributions: Treating principal as income (or vice versa) without authority can shift tax wrongly to the minor — and create fiduciary liability.
No tax planning before sale: Waiting until after closing leaves fewer options and can increase tax costs.
Poor recordkeeping: Losing receipts for improvements or missing closing paperwork makes correct basis calculation impossible and increases audit risk.

Short case study (hypothetical) — how accounting choices changed the outcome

In 2026, a trustee sold a rental property owned by a complex trust for $500,000. Adjusted basis was $200,000; selling costs were $30,000. Net gain = $270,000. The trust could either retain the gain (pay trust tax rates nearing the top bracket) or distribute the taxable portion to the 16-year-old beneficiary. After consulting counsel, the trustee amended the accounting to include a portion of the gain in DNI and issued a K-1 to the beneficiary. Although the beneficiary faced the kiddie tax calculation, the net combined tax paid by parents/child was lower than the trust tax bill would have been, preserving more principal for the minor’s future use.

When to get tax counsel (do this early)

Call tax counsel before you sign the sales contract if any of these apply:

The trust instrument is ambiguous about capital gains or distributions.
The beneficiary is a minor subject to kiddie tax rules.
The transaction involves out-of-state or foreign elements (FIRPTA withholding may apply to foreign sellers).
The trust holds other complex investments or the sale will produce a large gain.

Final checklist — what to deliver to the minor’s file after closing

Copy of closing statement and Form 1099-S (if issued).
Trust accounting ledger entry showing sale proceeds, allocations, and distributions.
Copy of Form 1041 and Schedule K-1 (when filed).
Notes from tax-counsel meetings and any written elections or court orders.
Estimated tax payment receipts, if made.

Questions trustees often ask

Should I always distribute capital gains to avoid trust tax brackets?

Not always. Distribution might trigger higher taxes for the beneficiary (kiddie tax) or violate the trust’s terms. Weigh tax savings against fiduciary duties and long-term needs of the minor.

What if the trustee is a relative and family members disagree?

Document decisions, get independent legal or tax advice, and consider asking a court to ratify actions if conflict risk is high. Transparent accounting protects you as trustee.

Wrap-up: practical next steps

Stop and prepare: Don’t close until you’ve verified the trust instrument and collected basis documentation.
Talk to a CPA and tax counsel experienced with trusts — ideally before signing the sale contract.
Document the decision-making process and produce a clear trust accounting showing how distributions and taxes were handled.

Tax rules in 2026 are less forgiving and enforcement is higher. A few hours with a CPA and counsel now can protect the minor’s inheritance and your position as trustee.

Call to action

If you’re preparing to sell trust-owned real estate for a minor, start with a tax review checklist. Contact a qualified trust tax counsel and a CPA who handles Form 1041 and K-1 allocations — and use sellmyhouse.live’s resources to find trusted closing agents and tax advisors experienced with trustee sales. Protect the child’s future: schedule a tax planning call before you list the property.

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