If you own a rental in Pittsburg or Antioch that has gone up in value, someone has probably pitched you a special trust. The promise: put the property in the trust, sell it, and never pay capital gains tax. The IRS (Internal Revenue Service) has a short answer for that promise: the tax does not go away. What does exist is a small set of legal tools that can delay the tax or shrink it. This page explains both, in plain words.
The pitch, in plain words
The pitch usually comes from a seminar or a paid promoter. It quotes two lines of the tax code, sections 643(a)(3) and 643(b) of the IRC (Internal Revenue Code), points at the words “excluded” and “income”, and says a trust written the right way never pays tax on its capital gains. Some versions say the gain can wait for generations.
Why it fails
Those two code sections are about accounting, not about what gets taxed. They decide how much of a trust’s income gets passed to the people named in it. A different section, 641, decides what the trust owes tax on, and it includes capital gains in the year they happen.
The IRS memo put it simply: either the trust pays the tax, or the money goes out to the beneficiaries and they pay it. Nobody skips it. The memo also asked that every trust of this type be examined.
What the IRS says, in its own words
The IRS keeps a public page on these schemes (last reviewed August 24, 2026). It describes the arrangement by name, “non-grantor, irrevocable, complex, discretionary, spendthrift trusts”, and says the claims behind it are unfounded: “There is no such exclusion or deduction from taxable income of a trust.”
The same page covers what happens to people who buy in. The civil fraud penalty can reach 75% of the unpaid tax, on top of the tax itself. Criminal convictions can bring fines up to $250,000 and up to five years in prison for each offense.
A companion IRS page (reviewed April 30, 2026) adds one more point. When the paperwork says you gave the property away, but you keep running it and spending the rent, courts set the trust aside and tax you directly. They have done it consistently.
What a spendthrift clause really does
The clause itself is ordinary. It stops an heir from selling or pledging their future inheritance, and it keeps the heir’s creditors away from money still inside the trust. Estate attorneys write these every day, and there is nothing wrong with them. The scheme takes this normal clause and attaches a false tax promise to it. The promise is the problem, not the clause.
Warning signs
- The promise is that capital gains, dividends, or rent will never be taxed, because of how the trust is written.
- The sales material quotes section 643 of the tax code and little else.
- You are told the trust is private, and that your CPA (certified public accountant) or attorney will not understand it.
- You keep using the property and spending the rent, while the paperwork says you gave it up.
- The fee is a percentage of the tax you are supposed to avoid.
The legal ways to lower or delay the tax
Four tools are real, and each has a rule and a limit:
| Tool | What it does | The rule | The limit |
|---|---|---|---|
| Main-home exclusion | Excludes up to $250,000 of gain, or $500,000 on a joint return, when you sell the home you live in | IRC 121; IRS Topic 701 (reviewed October 12, 2026) | You must have owned and used the home as your residence for at least 24 months in the five years before the sale; a rental you never lived in does not qualify |
| Like-kind exchange | Defers the gain when you sell an investment property and buy another investment property through a qualified intermediary | IRC 1031; see combination 1031 exchange and the croskeypm.com 1031 guide | 45 days to identify the new property, 180 days to close; investment or business use on both sides; the deferred gain carries into the new property |
| Installment sale | Spreads the gain over the years you receive payments when you carry financing for the buyer | IRC 453; IRS Topic 705 (reviewed September 24, 2026), reported on Form 6252 | You include in income each year only the part of the gain you receive that year; the tax is spread, not removed |
| Charitable remainder trust | Moves the asset into a trust that pays you an income stream and leaves the remainder to a charity | IRC 664; discuss with a CPA or estate attorney | Irrevocable; the remainder goes to the charity, not to your heirs |
Two of these have their own guides on this site: how to defer capital gains taxes and the combination 1031 exchange. One thing to watch: bills introduced in Congress in December 2025 and February 2026 would raise the main-home exclusion to $500,000 and $1,000,000. Neither had passed as of this writing, so the old limits still apply.
Our read, from the operator’s chair
The call usually comes after a seminar. An owner bought a Pittsburg rental twenty years ago, just heard that a trust can make the gain disappear, and wants to know if it works. The honest answer: the IRS page says what it says.
The owners who come out ahead do something less exciting. They sit down with a CPA, run the four legal tools against their own numbers, and then decide. Sometimes the answer is to keep the rental and trade up through a 1031 exchange. Sometimes it is to sell with seller financing and spread the gain out. Sometimes it is to move back in for two years. None of that beats the IRS. All of it survives an audit.
The takeaway
A trust that promises to beat capital gains tax forever is the one the IRS is looking for. The tools that work are slower and smaller, and they hold up. Run them with your CPA. And if the real question is whether to keep the rental or sell it, that is a conversation we have every week. It starts with a pricing analysis from the sold homes on your street, and the sell page is where it begins. Real estate line: (925) 219-8488.
Sources
- IRS, Abusive trust tax evasion schemes, talking points: https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-talking-points (page reviewed August 24, 2026)
- IRS, Abusive trust tax evasion schemes, facts, section III: https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-facts-section-iii (reviewed April 30, 2026)
- IRS Chief Counsel memorandum AM 2023-006, August 9, 2023, as named on the IRS page above
- IRS Topic 701, Sale of your home: https://www.irs.gov/taxtopics/tc701 (reviewed October 12, 2026)
- IRS Topic 705, Installment sales: https://www.irs.gov/taxtopics/tc705 (reviewed September 24, 2026)
This article is general information from irs.gov pages and IRS Chief Counsel memo AM 2023-006, as read on October 13, 2026. It is not tax or legal advice. Croskey Real Estate is a licensed California brokerage, not a CPA firm, a law firm, or a qualified intermediary. Tax law changes; confirm the current rules with a CPA or tax attorney before acting.
Frequently asked questions
Is a spendthrift trust illegal?
No. The clause itself is a normal estate-planning tool. It protects an heir’s inheritance from creditors and from the heir’s own spending. What the IRS calls abusive is the version sold as a way to skip income tax on capital gains. The clause is fine; the tax promise is not.
Can a trust defer capital gains tax?
Not the way the pitch describes. Under the IRS position, a trust pays tax on its gains the year they happen, unless it pays the money out to its beneficiaries, who then pay the tax. Either way, someone pays that year. The gain does not wait for generations.
What if I already set one of these trusts up?
Talk to a CPA (certified public accountant) or a tax attorney now, before the next return is due. The IRS asked that every trust of this type be examined, and the civil fraud penalty can reach 75% of the unpaid tax. Fixing your returns on your own initiative is a much better conversation with the IRS than being found.
What are the legal options for the gain on a Pittsburg or Antioch rental?
Four, each with a rule. The main-home exclusion, if you lived in the property 24 of the last 60 months. A 1031 exchange into another investment property, with 45 days to pick it and 180 to close. An installment sale, which spreads the gain over the years you receive payments. And a charitable remainder trust, if a charity is part of your plan. A CPA can tell you which one fits your numbers.
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