What are the Tax Implications of Owning Property in a Nominee Realty Trust?
Question:
I just had three nominee trusts set up to hold rental properties. Not all major banks in Massachusetts provide realty trust bank accounts. So can I continue to use my own personal bank account to conduct rental business like before? Does the IRS allow it? If not, do I need three different tax identification numbers (EINs) for the trust bank accounts? Can I have just one trust account to cover all three nominee trusts?
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Response:
Nominee realty trusts are odd creatures—hybrids between trusts and agency agreements, used primarily in Massachusetts. The trustee or trustees of the trusts must act on behalf of and at the direction of beneficial owners who are typically listed on separate schedules that are not recorded at the registry of deeds. The question is: who are the beneficial owners in your case? Assuming that you’re the sole beneficial owner, then you can use your own Social Security number for the bank account or accounts. The problem you may run into with a single bank account, rather than a separate one for each trust, is that if the rent checks come in the name of the different nominee trusts, you may not be able to deposit them in an account with a different name.
If, on the other hand, multiple people or trusts are beneficiaries of each nominee trust, you will have to get a separate tax identification number for each and file a separate tax return for each every year. If there are underlying trusts, you can use their tax identification numbers, rather than getting additional ones for the nominee trusts. In either case, the nominee trusts will not actually have to pay any taxes; the reported income will pass through to the ultimate beneficiaries and any taxes due paid by them.
All of this raises the question of why you are using nominee trusts in the first case, and why three separate nominee trusts. Nominee realty trusts are often used when there are several owners with different ownership interests, owners want to keep their ownership interests private, or when there are several owners and it’s easier not to list them all on the deed. If your purpose of having nominee trusts was to protect you or the other beneficial owners from potential liability, the nominee trusts on their own don’t provide this benefit. You would need to create more formal trusts or a limited liability entity to do so.
Related Articles:
How Do You Report the Income on a Nominee Realty Trust
How Does the Sale of Property Owned by a Nominee Realty Trust Work?
How Can I Transfer Fractional Shares of My Real Estate to My Children
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