Are Land Trusts Disregarded Entities for Tax Purposes?
A land trust can provide anonymity and asset protection, but how are they treated for tax purposes?
It will depend on the type of trust you decide to form. Land trusts can be “simple, complex, or grantor trust[s] depending on the terms of the trust instrument”
In this article we will define what a disregarded entity means, what type of land trust is a disregarded entity, and other ways land trusts can be taxed.
What is a Disregarded Entity?
Before we jump right into what types of trusts are disregarded for tax purposes, let’s recap what disregarded entities are.
Disregarded Entities are “pass-through entities” that do not pay tax at the entity level, and do not file a tax return. Instead, you report the entity’s income and deductions are reported directly on your tax return (or whoever owns the trust).
This is good news is you don’t need to file an additional tax return for the trust, which of course would cost more money.
What Type of Land Trusts are Disregarded Entities?
For the most part, land trusts are structured as grantor trusts (also called revocable trusts), which are disregarded.
That is because you, the grantor of the trust, remain in control of the trust and its assets. You’re considered the owner of the trust for tax purposes.
This differs from an irrevocable trust, where you give up all ownership rights of the trust and its assets. In this case the trust would be considered its own entity, and need its own tax return.
Series LLCs, Land Trusts, and Taxes.
If your land trust is incorporated using a series LLC, its tax treatment will be determined by the tax treatment of the LLC.
Author: Thomas Castelli, CPA is a Tax Strategist and member of The Real Estate CPA, an accounting firm that helps real estate investors keep more of their hard-earned dollars in their pockets, and out of the government’s, by using creative tax strategies and planning.