If a house owned by a Living Trust is used at spouse's death to fund part of a By Pass Trust, would any income tax benfits be lost? In particular I am concerned about the ability to use the $250,000/$500,000 expentions from profit on the sale of a residence.

Thanks for any help with this question?

Only individuals can claim the exemption of $250,000 each on the gain from the sale of a personal residence. If the house is put in the bypass trust, the trust is the owner and therefore not eligible for the exemption.

Other issues arise if there is a mortgage on the house.

Since the house would receive a step up in basis to FMV at date of death, no benefit is actually lost. If the house is continued to be held, the future appreciation would not be eligible for any exclusion.

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