Land trusts are incredibly useful for real estate investors. They allow clever investors to remain anonymous, prevent lawsuits, easily manage investments, and offer many more financial and legal perks. With all of those sweet benefits, it’s no wonder real estate investors are falling for this sexy beast of a tool. But as with most awesome things in life, you’ve got to pay to play. So this piece is here to guide you through the decidedly unsexy part of land trusts: taxes.
Nobody likes to dole out any more cash to Uncle Sam than necessary. But we’re here to show you the tax requirements and benefits of using a land trust. It as painless as possible. Here are quick and dirty answers to the four most frequently asked questions we get about land trusts and taxes.
1. Do I Have to File Taxes For My Land Trust?
In short: definitely. Failure to file taxes on anything that produces income is considered tax evasion, which you may know as the felony that finally landed Al Capone behind bars. While you’re probably not running an illegal bootlegging operation, tax evasion on its own is a very serious matter. The last thing a real estate investor, or any business owner, needs is to get into a fight with Uncle Sam.
2. Do Land Trusts Offer Any Tax Benefits?
Land trusts absolutely come with certain tax perks. Some of the most popular are the following:
- Pass-through tax treatment. This means your profits flow right back into the beneficiary’s income for tax purposes. With few exceptions, this makes taxes cheaper and also simplifies the filing process.
- Legal status of land trusts. Technically, your land trust isn’t treated like a trust by our buddies at the IRS. There are ways your attorney can help you ensure that you get the best treatment.
- Ability to incorporate into other entities and agreements. If your land trust or its members are part of an entity like an LLC, S-Corp, or Series LLC, some states will allow it. All of these entities also receive passthrough tax treatment. However, you’ll want to ensure your operating agreement distributes profits and tax benefits equitably. An improperly structured operating agreement can effectively cancel out your passthrough benefits.
3. What Will My Land Trust Taxes Cost?
How much your land trust taxes will actually cost you is going to depend on the state the trust is formed in. If the trust is for an investment property outside of your home state, your state of residence may also have additional tax requirements. To be sure you’re filing appropriately, make sure you have a good CPA.
Regardless of your level of experience, it’s a good idea to have a real estate dream team that includes a CPA and qualified, detail-oriented attorney. That said, you can get an idea of your state’s requirements with a cursory internet search.
4. How Do I Report My Land Trust on My Tax Return?
Because you’ll receive passthrough treatment, you simply will report your taxes on your personal return. For detailed instructions, consult with one of the dream team members mentioned above. If you still haven’t formed your dream team, that’s okay: we can help.
Royal Legal Solutions has attorneys, tax professionals, and CPA partners that can help you navigate these tedious waters. As investors ourselves, we love helping our clients get the most out of both their land trusts and their tax preparations. To learn more about how to best take advantage of your land trust for tax purposes, contact us to plan your land trust tax consultation.