How Does Nominee Trust Report and Pay Capital Gain on Sale of Property?
My brother and I are the trustees of a “Nominee Trust.” We sold the property held in the last month. The trustees and two other brothers, total four, are the beneficiaries of the trust. What tax laws apply in filing for capital gains? Which tax forms are required to be filed? What expenses are deductible?
Nominee trusts (or “nominee realty” trusts), which are used primarily in Massachusetts, are an unusual hybrid. Although they’re called “trusts,” they’re really more of an agency agreement. The trustees hold the property on behalf of the beneficiaries named on a separate schedule. The trustees usually cannot take major actions like selling the property without the approval of the beneficiaries. The beneficiaries are the true owners of the property and any tax consequences on its sale pass through to them.
Your capital gain will be the difference between the net proceeds of the sale and the property’s basis. Typically the basis is the property’s purchase price. But this may not be the case in certain circumstances. For instance, if you inherited the property its basis would be it’s value on the date of the death of the person from whom you inherited it. Or if it was business property and you took deductions amortizing it’s value, the basis may have been reduced. In any case, each of the beneficiaries will have to report a quarter of the total gain on their tax returns.You may deduct expenses related to the property’s sale, such as the real estate broker’s commission.
The trust itself may or may not have to file a return. That depends on whether you obtained a separate tax identification number for the trust. If the trust does have a separate tax identification number, then it will file a 1041 return, will it will report the gain. However, it will pay no taxes. Instead, it will issue a K-1 to each of the beneficiaries reporting their portion of the gain, similar to a 1099 they might receive from a bank or other financial institution.