Can a Trust be a Real Estate Professional?

Can a trust be a real estate professional? A recent case of a Michigan real estate developer’s estate holds an answer to this important question. The ruling qualified the taxpayer for exception on the basis that the trust owned real estate properties and engaged in other real estate activities. Classifying a trust as a real estate professional provides exemption from passive activity rules, potentially saving trusts millions in taxes.

A passive activity is any activity conducted by a trade or business in which a person does not materially participate, such as rental activity. However, there are exceptions to this rule. For example, the rule for rental activities does not apply to a qualifying real estate professional if:

•    More than half of the personal services the real estate professional performs during the year are performed in real property trades or businesses in which the professional materially participates; and
•    The real estate professional performs more than 750 hours of services during that tax year in real property trades or businesses in which the professional materially participates.

In the case of the Frank Aragona Trust, the Tax Court concluded that if the trustees are individuals working in a trade or business as part of their trustee duties, their work can be considered “work performed by an individual in connection with a trade or business.” Accordingly, it concluded that a trust is capable of performing personal services and therefore can be considered a real estate professional.

The court then determined that the trust materially participated in its real estate operations and thus qualifies for the exception. The holding in this case could potentially result in fewer trusts being liable for the 3.8 percent surtax on investment income.

To fully understand how these laws may be relevant to your bottom line, please contact Larry Wood, CPA/CFP and Partner at DZH Phillips, one of the most competent and prestigious accounting firms on the west coast. Larry brings a wide breadth of experience to the table, with a particular emphasis on real estate and income tax planning. Click here to contact him to discuss your specific needs, or email him directly at LWood@Dzhphillips.com.