How Do You Report the Income on a Nominee Realty Trust

 In Revocable Trusts

Question:

Are Nominee Trusts (or Realty Trusts) revocable by nature? Since they don’t require a trust tax return at the end of the year, and it is my understanding that they are of “pass through” nature, how does one rent the real estate property involved?

Response:

Nominee trusts are a hybrid between true trusts and agency agreements where one or more individuals are appointed to act for others. Typically, the trustee or trustees of a nominee trust act on behalf of beneficiaries named in a separate document. The beneficiaries may be individuals, trusts or business entities such as limited liability companies. The trustee of the nominee trust will have certain powers granted in the nominee trust document but ultimately must act as directed by the beneficiaries. As you suggest, nominee trusts are used primarily to hold real estate and are often referred to as “nominee realty” trusts. They are also used more in Massachusetts than in other states.

Such nominee trusts can serve several purposes. They can conceal the identity of the true owners, keep the terms of an underlying trust private, and facilitate the transfer of ownership. For instance, if a parent is giving partial shares of a vacation home to children over time, it’s much easier to make such transfers by registering the ownership changes on a private affidavit of owners rather than recording a new deed with each gift. Further, once the children own the vacation home, they may choose one or two of their generation to manage the property for the benefit of all the owners.

To get to your questions, you may have to get a tax identification for the trust. This would not be for IRS purposes. Instead, the bank may well require such a number in order to open a bank account in the name of the nominee trust in order to collect rents and pay expenses. For tax purposes, the trust, as you suggest, would be a pass through. The trustees would file an annual 1041 return reporting the rental income and operating expenses with the net income passing through to the beneficiaries. The trust would pay no tax, but would issue k-1 reports to the beneficiaries reporting the income deemed to them.

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