Qualified Personal Residence Trust (QPRT): Transferring Your Home at a Discount (2026)

The §2702(a)(3)(A) QPRT Exception

IRC §2702 generally values the retained interest in a family-member transfer at zero, valuing the full transferred property as the gift. The §2702(a)(3)(A) exception explicitly permits a special-purpose qualified personal residence trust to apply the actuarial valuation of the retained term interest (reducing the taxable gift to only the remainder interest's present value). The detailed QPRT requirements are set out in Treas. Reg. §25.2702-5.

The QPRT works by taking advantage of the actuarial valuation rules. A 65-year-old grantor with a 10-year term retains a term interest (the right to live rent-free for 10 years) that has substantial actuarial value. At a 5% §7520 rate, the present value of a 10-year term interest in a personal residence is approximately 41% of the residence value. The taxable gift to the remainder beneficiaries is approximately 59% of the residence value: a 41% discount on the funding transfer.

The discount is larger when (a) the term is longer (more years of retained use), (b) the §7520 rate is higher (the actuarial discount is larger), and (c) the grantor is younger at funding (longer probable life expectancy reduces the present value of the remainder relative to the term). The discount is smaller for older grantors or shorter terms.

QPRT Mortality Risk and Term Selection

The principal risk in QPRT planning is mortality. Under IRC §2036(a), if the grantor dies before the end of the QPRT term, the full fair market value of the residence as of the date of death is included in the grantor's gross estate. The §2702-5(c)(8) regulations require the trust to provide that if the grantor dies during the term, the residence reverts to the grantor's estate (which is what triggers §2036 inclusion).

QPRT term selection balances the discount benefit against mortality risk. A 10-year term for a 60-year-old grantor produces about a 45% discount but has approximately 6% statistical mortality risk over the term. A 20-year term for the same grantor produces a 65% discount but has approximately 18% statistical mortality risk. The actuarial expected value of the planning is positive even at moderate mortality risk; the question is whether the grantor is comfortable with the worst-case outcome (full inclusion in the estate, with the planning fee wasted).

Common QPRT term selections include 5, 10, 15, or 20 years. Older grantors typically choose shorter terms (5-10 years) to minimize mortality risk; younger grantors with longer life expectancy choose longer terms (15-20 years) to maximize discount. The technique is most appropriate for grantors in their 50s and 60s in reasonable health; older or unhealthy grantors face unfavorable mortality math.

Living in the Residence After the QPRT Term Ends

At the end of the QPRT term, the residence passes to the remainder beneficiaries (children, or trusts for the children's benefit). The grantor no longer has any right to live in the residence rent-free. The grantor must either move out or pay fair-market rent to the children to continue occupying the residence.

Paying market-rate rent to the children is a feature, not a bug, of QPRT planning. The rent is not a gift (it is consideration for the right to occupy) and so does not consume lifetime gift exemption. The rent transfers additional value from the grantor's estate to the children in a fully gift-tax-free form. Over many years of post-term occupancy with market rent, the cumulative rent transferred can be substantial.

The fair-market rent must be genuine: the IRS can challenge below-market rent as a retained interest in the residence under IRC §2036(a)(1), which would pull the residence back into the gross estate. The rent should be set with reference to comparable rental market data and ideally documented annually. Many QPRT grantors hire a real estate broker to provide a market-rent opinion to support the rent level.

The Proposition 13 Problem (California QPRTs)

For California QPRTs, the principal complication is Proposition 13 property tax reassessment. Under California Rev. & Tax. Code §62, transfer of a residence to a QPRT is generally a change in ownership triggering reassessment to current market value, often dramatically increasing the annual property tax bill. This is one of the principal reasons California QPRTs are less common than QPRTs in other states.

Limited Prop 13 exclusions may apply (the principal-residence parent-child exclusion under Prop 19, limited to $1M of value above the original base, and only for transfers occurring within a year of the transferor's death). For QPRTs that take effect at funding (not at the grantor's death), the parent-child exclusion typically does not apply, and full reassessment occurs.

California estate planning practitioners frequently advise against QPRTs for California residences because of the Prop 13 reassessment problem. Alternative strategies for California real estate include leaving the residence in the grantor's gross estate and relying on the step-up in basis at death under IRC §1014, or transferring the residence through a sale to an intentionally defective grantor trust (IDGT) that does not trigger Prop 13 reassessment. See our California revocable trust page for more on Prop 13 mechanics.

Mortgages and the QPRT

The QPRT can be funded with a residence subject to a mortgage, but the mortgage creates planning complexity. The grantor must continue paying mortgage payments during the term (the trust does not have its own income to pay the mortgage). Each principal payment by the grantor on the trust's mortgage is treated as an additional gift to the remainder beneficiaries under the regulations.

Most QPRT practitioners recommend paying off the mortgage before funding the QPRT, or funding the QPRT with a residence that has no mortgage. If a mortgage must remain, the grantor should track each principal payment as a gift and use annual exclusion or lifetime exemption to cover the gift value.

Refinancing the mortgage during the QPRT term is permitted but adds compliance burden. The new mortgage must be in the trust's name (with the trustee as the borrower) or, if in the grantor's name, must be documented as a loan from the grantor to the trust (which the trust must repay). The mechanics quickly become complex; this is another argument for paying off the mortgage before funding.

QPRT Sale of the Residence

Treas. Reg. §25.2702-5(c)(9) permits the QPRT to sell the residence during the term and reinvest the proceeds in another residence (similar to a §1031 exchange concept), or to hold the proceeds in cash for up to two years to acquire a new residence. If no new residence is acquired within two years, the QPRT must convert to a GRAT (a Grantor Retained Annuity Trust) and begin making annuity payments to the grantor, or the QPRT terminates and the remaining cash distributes to the grantor.

The grantor's basis in the residence (and any reinvested residence) carries over to the trust under IRC §1015. When the trust later sells the residence (during the term or after), the trust takes the grantor's carryover basis and recognizes capital gain accordingly. The §121 principal residence exclusion (up to $500,000 of gain for a married couple) is generally available because the trust is a grantor trust and the residence is the grantor's principal residence.

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