Does a Land Trust Have to File a Tax Return?

A land trust is defined as an entity used to hold title to real estate. Unlike the standard trust, usually land trust doesn’t involve family. Also, a land trust offers versatility for real estate investors since they are allowed to hold not only real estate but real estate related assets such as real estate notes. A land trust can also hold deeds and financial agreements. Land trusts also provide several benefits:

 

  1. A land trust doesn’t go through probate court. As personal property, land in a trust doesn’t go through the usual tedious court proceedings required to sell, rent and otherwise manage property in the land trust.
  2. A land trust offers anonymity. This is one of the most attractive facets of a land trust and a critical component in preventing lawsuits. The name recorded on a trust is not attached to the parties involved in the trust, thus any worth or personal information attached to that property is hidden. As a result, lawsuits don’t appear to have much monetary incentive and seem more of a hassle to pursuit.

Revocable and Irrevocable Land Trust

However, there are some important tax considerations to keep in mind. Tax treatment depends on the type of trust that’s established. According to IRS definitions: “The land trust has no special distinction in the Internal Revenue Code and would be a simple, complex, or grantor trust depending on the terms of the trust instrument. Filing requirements would depend on the type of trust.” Here are the two types of trust:

 

  1. Revocable Trust. Most land trusts are revocable. A revocable trust is one in which the provisions can be either canceled or adjusted.
  2. Irrevocable Trust. An irrevocable trust is where the grantor, or creator of the trust has forfeited his rights of ownership.

Land Trusts as Pass Through Entities

Because most land trusts are revocable, they don’t have to file a separate return. This is because a revocable land trust is seen as a pass through entity by the IRS. Any income on the land trusts is treated as personal income and thus reported only on a personal tax return. As a pass through entity, a land trust doesn’t lead to the grantor being taxed twice. It also saves time and money, since additional tax filing documents and fees aren’t required. For instance, Jane is recorded as the individual who has the power to revoke the land trust named Oak Tree 123. This may seem like a vague and uninteresting name, but this can actually work to Jane’s advantage. Here’s a good primer on why vague and uninteresting is bad for your Tinder profile, but great for your land trust name. When tax time rolls around, Jane will simply report any income from her Oak Tree 123 trust on her own personal income form, reporting it just like it was any other type of income.

Incorporating Your Land Trust with a Series LLC

When you incorporate your land trust within a series LLC, the tax filing process not only remains simple because it’s a pass through entity, but you also enjoy maximum asset protection. Remember, a land trust is just like a regular trust in that it provides anonymity. The anonymity of a trust can help prevent lawsuits from even starting. Meanwhile, the series LLC structure separates assets under individual “child” LLCs, so an attack on one LLC doesn’t spread to others. However, a land trust can be incorporated within a variety of entities such as an LLC or S-Corp. Each will have its own tax implications to consider and cost, especially if you’re managing multiple LLCs.

When a Land Trust Requires a Trust Tax Return

There are a few exceptions to the tax filing procedure mentioned above with Jane’s revocable land trust. In cases where the landowner passes, the beneficiary will be required to file both a tax return on the trust and estate. In addition, in the more uncommon case of a land trust being irrevocable, the usual tax filing procedure mentioned above won’t apply. Instead, the trust creator may have to file a separate trust tax return. This would require filing out tax form 1041.

Steps to Filing Taxes With a Land Trust

Whether you have a revocable or irrevocable land trust, the following steps are essential to staying out of trouble with Uncle Sam.

 

  1. Keep accurate records of income. This will be reported along with information about gains and losses.
  2. Consult with a legal team. Our team of experts are real estate investors themselves. We can help you setup a land trust that provides maximum asset protection as well as potential tax benefits.
  3. Ensure all tax documents are copied and shared with the main parties of the land trust. These include the beneficiary, grantor, and trustee.

Combine Asset Protection and Tax Efficiency

We hope this article has been useful in explaining some of the important tax considerations to be mindful of when working with a land trust. We are one of the few firms in America to regularly manage land trusts. Our expertise allows us to provide a combination of asset protection and tax efficiency.

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