Charitable remainder trusts

A charitable remainder trust, a CRT, is one of the most elegant tools in real estate tax for an investor sitting on a highly appreciated, low-basis property who wants out without a crushing capital gains bill and does not intend to do a 1031. It does four things at once: it sells the property with no immediate capital gains tax, it pays you an income stream for years or life, it gives you a charitable deduction today, and it leaves whatever remains to charity. For the right investor, with genuine charitable intent and a large appreciated asset, the combination is hard to beat.

How it works: the tax-exempt sale

A CRT is an irrevocable split-interest trust under IRC Section 664. You transfer your appreciated property into the trust, and here is the key move: the trust, which is tax-exempt, sells the property and pays no capital gains tax on the sale. So the full pre-tax proceeds, not the after-tax remainder, stay invested and working.

Contrast that with selling the property yourself: you would pay capital gains tax and depreciation recapture first, and only the net would be reinvested. Inside the CRT, the entire gain is preserved and reinvested, and the trust then pays you an income stream from those proceeds. The deferred tax compounds inside the trust instead of leaving with the IRS. This tax-exempt sale of the appreciated asset is the engine of the whole strategy, and it is why a CRT shines precisely for the low-basis property that would otherwise trigger a large tax on sale.

A charitable remainder trust is tax-exempt, so it sells your appreciated property with no capital gains tax, keeping the full pre-tax proceeds invested to fund your income stream.

The income stream, the deduction, and the two flavors

In exchange for the eventual gift to charity, you (or another non-charitable beneficiary) retain an income stream for life or a term of up to 20 years. Two structures set how that income is calculated. A charitable remainder annuity trust, a CRAT, pays a fixed dollar amount set at inception, regardless of how the investments perform. A charitable remainder unitrust, a CRUT, pays a fixed percentage of the trust’s value, recalculated annually, so the payout rises and falls with the trust’s value; the CRUT is more common because it allows additional contributions and inflation-responsive income. Both must pay between 5% and 50% annually.

You also get an immediate partial charitable income tax deduction, equal to the present value of the remainder interest that will eventually pass to charity, typically 30% to 50% of the contributed value. And because the trust must leave a meaningful gift to charity, the present value of that remainder interest must be at least 10% of what you put in. One more benefit: because the CRT is irrevocable, the contributed assets leave your taxable estate, which matters more now that the estate landscape is shifting.

You keep an income stream for life or up to 20 years, calculated as a fixed amount (CRAT) or a revalued percentage (CRUT), plus an immediate charitable deduction for the present value of the remainder.

The catch: the gain is deferred, not vanished, and it is irrevocable

Two honest limits. First, the capital gain is not erased, it is deferred and metered back to you. CRT distributions follow a four-tier ordering system that pays out the most highly taxed dollars first: ordinary income, then capital gain, then tax-exempt income, then tax-free return of principal. So the capital gain the trust avoided at sale comes back to you as capital-gain-taxed distributions over the years, until it is exhausted. You have spread and deferred the gain and kept the full proceeds working, but you have not made the gain disappear (that is what the step-up in basis does, and a CRT is a different tool for a different goal).

Second, and this is the big one: a CRT is irrevocable. Once you fund it, you cannot undo it, cannot get the principal back, and the remainder truly goes to charity, not your heirs. So it fits an investor with genuine charitable intent, a large appreciated asset (generally worth it above roughly $500,000 given setup and trustee costs), and a need for income. It is the wrong tool if your goal is to pass wealth to your children, though some pair a CRT with a life insurance trust to replace the value for heirs.

The avoided gain returns as capital-gain-taxed distributions under a four-tier payout order, and the trust is irrevocable, so a CRT fits genuine charitable intent and an income need, not a plan to enrich heirs.

The bottom line

• A charitable remainder trust is tax-exempt and sells your appreciated property with no immediate capital gains tax.
• The full pre-tax proceeds stay invested and fund an income stream to you for life or up to 20 years.
• You get an immediate partial charitable deduction and remove the asset from your taxable estate.
• The avoided gain returns as capital-gain-taxed distributions over time under a four-tier payout order.
• It is irrevocable and fits genuine charitable intent and an income need, not passing wealth to heirs.

For the alternative that erases gain entirely, read step-up in basis. For a simpler donation approach, see donating appreciated property. For the full picture, start at the advanced real estate tax strategies hub.

Last verified August 2026.