Land Trust Tax Implications

Land Trust Tax Implications

What Is a Land Trust?

A land trust is a variety of living trust that allows one party to hold ownership of a piece of real estate for another party. The owner of the real estate does not give up control to the trustee. Rather, the trustee becomes owner of the property for legal reasons, providing the owner with privacy, asset control, and other tax and legal protections. Additionally, land trusts are considered revocable trusts, which allows for amending or terminating the trust at any given time.

Benefits of Revocable Living Trusts

Revocable living trusts, such as land trusts, can offer several useful benefits. Here are some of the benefits you can enjoy by creating a revocable living trust:

  • Add or remove assets from the trust at your choosing.
  • Amend your trust as you feel it requires.
  • Maintain control of the assets placed in the trust.
  • Maintain entitlement to trust income.
  • Avoid income tax on income generated by the trust.
  • Act as trustee and manage the trust’s assets.
  • Designate a trustee or successor trustee should you need one.
  • Avoid the hassle and expenses of probate.
  • Transfer assets directly to your designated beneficiaries.

Land Trust for Tax Purposes

Land trusts are effectively tax neutral meaning that they do not have a negative or positive affect on your taxes. A land trust is a pass-through entity with essentially no affect on taxes. The IRS regards land trusts as disregarded entities and does not assign them tax ID numbers.

Any income the land trust generates is treated as personal income and therefore reported on your personal tax return. While the land trust does not have to worry about income tax while the trustor is living, there may be tax considerations to take into account when the trustor passes away and the revocable trust becomes an irrevocable trust.

Do Land Trusts Have to File Tax Returns?

There are different scenarios in which a land trust must file a tax return. However, revocable land trusts do not have to file tax returns. Note, however, that circumstances change once the trustor has passed away. When the trustor of a land trust passes away, the beneficiaries of the trust will need to file its own tax return on behalf of the estate and trust. Once the trustor of the land trust passes away, no additional changes or modifications can be made. This turns the revocable living trust into an irrevocable living trust. Irrevocable trusts do not share the same disregarded entity status that a revocable living trust does. For this reason, the trust will have to pay taxes. Note that once the trust becomes an irrevocable trust, it requires its own individual tax ID number.

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