How is Income of a Nominee Realty Trust Reported in Massachusetts?

 In Real Estate, Revocable Trusts
nominee-real-estate-trust-estate-planning-attorney-wellesley-ma

Photo by Andrew Barrowman on Unsplash

Question:

Which Massachusetts tax form do I file for a nominee real estate trust? The only income is interest earned of $1,600 from the proceeds sitting in a bank account until they were disbursed. The only expenses were accounting, bookkeeping, and legal advice. I was told I can’t write those off in Massachusetts.

Response:

I checked with an accountant on this one and had trouble getting an answer because of some cognitive dissonance. She couldn’t understand why a nominee realty trust would be filing a tax return. Normally, nominee realty trusts only hold title on behalf of beneficiaries, whether individuals or further trusts. Any income and expense should pass through to them and be reported on their tax returns.

But I’m going to assume that you had to obtain a tax identification number for the nominee trust in order to open a bank account. In that case, you still do not have to file a tax return. But if you were to do so, you would use Form 1041 for the federal return and Form 2 for Massachusetts. Whether the trust or the beneficiaries can deduct legal, accounting, and booking expenses depends on whether the underlying real estate is being rented out. If so, they are deductible. If not, but it is rental property, then they may be able to be added to the property’s cost basis. As you can see, this can get complicated and you may well want to consult with an accountant before taking these deductions. (Of course, given just $1,600 of income, it may not be worth the trouble.)

Note to reader: Nominee trusts are used almost exclusively in Massachusetts to hold title to real estate when it’s easier than revealing the underlying owners. This may be done for privacy concerns or when there are multiple owners with different interests. It can facilitate gifting when, for instance, parents want to give property to their children over many years without recording a new deed each year. While it’s a very useful device, it can create some confusion, as in this case.

 

Related Articles:

What are the Tax Implications of Owning Property in Nominee Realty Trusts?

How Do You Report the Income on a Nominee Realty Trust

How Are Revocable and Irrevocable Trusts Taxed?

How Can I Transfer Fractional Shares of My Real Estate to My Children

Recommended Posts

Leave a Comment

Start typing and press Enter to search