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:
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:
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. Names that are vague and uninteresting are bad for your Tinder profile, but creative trust names are great for your land trust. 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.
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.
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.
Whether you have a revocable or irrevocable land trust, the following steps are essential to staying out of trouble with Uncle Sam.
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.
Interested in learning more? Check out our article How Honest is it to Use a Land Trust for Asset Protection?
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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