Land trusts and taxes - Posted by John(NH)

Posted by Bill Gatten on April 09, 1999 at 18:03:07:

Big Bass,

I thought I had answered this, but everytime I try to click on what I thought I wrote to you, I get a note by JHyre that has nothing do with the thread. So here goes again.

In a land trust, the Trustee holds BOTH legal and equitable title, although the tax benefits flow to the beneficiaries. The IRS looks “through” a land trust, and treats the beneficiaries as owners of Realty, even though the courts treat such ownership as Personalty.

To be a trustee in a land trust gives you nothing except the right to hold the title (without any of the benefits of Fee-Simple Real Estate Ownership) and the right to sell the property (at the direction of the beneficiaries, or in the event of a default by the beneficiaries in their obligation to you or to the property)… that’s all.

Ziz clear it all up?

(Gawd! I’m getting accused of being too complicated by everyone… I try to tell folks the time, and end up teaching them how to build a clock. Sorry–will do better in the future)?


Land trusts and taxes - Posted by John(NH)

Posted by John(NH) on April 07, 1999 at 13:13:05:

I’m not clear on this. Scenario: a seller has a conventional non-assumable mortgage, and he puts it into a land trust and transfers his beneficial interest to the buyer. Doesn’t the bank report the interest paid to the IRS in the seller’s name since his name is on the mortgage? How does the buyer, who now has beneficial interest in the trust, receive the tax benefits?


Re: Land trusts and taxes - Posted by Bronchick

Posted by Bronchick on April 08, 1999 at 09:26:07:

The 1098 mortgage interest statement is reported, but keep in mind that deducting mortgage interest is OPTIONAL. The IRS is not concerned if John Doe’s lender has reported a 1098 mortgage interest statement and John Doe did not take the deduction - he is always free to not itemize on schedule A and take the standard deduction instead.

As for the new beneficiary of the trust, he can take the deduction so long as he can prove he has an interest in the property and the responsibility to make the payments. If it is a rental property, he just reports the interest as a expense. If it is his personal residence, then Schedule “A” of his federal income tax return asks who the 1098 was reported to (which, of course would be the previous owner).

qlad you asked that??? - Posted by Nancy in NC

Posted by Nancy in NC on April 07, 1999 at 20:41:32:

Thanks for asking that one, I am trying to learn the details, and have it clean in my mind before I start this, and Bill Gatten’s answers are always worth reading and printing out.

Re: Land trusts and taxes - Posted by Bill Gatten

Posted by Bill Gatten on April 07, 1999 at 17:33:33:

Section 163(h)4(D) re. trusts and estates in which legal and equitable interest in held by a trustee:

The taxpayer must be able to prove having a contractual obligation to pay all the deductible amounts; that the house is his/her home; that he/she has the risks and burdens of ownership (possession); and that he/she is the one who makes the payments. The tax payer must also be able to prove that they have either–1) an “equitable interest” in the property (which one can’t, if just a beneficiary in a land trust); or 2)that the tax payer is a bona fide beneficiary in an estate or trust which holds the equitable interest in the property (which the land trust trustee does).

Copies of the 1099 should be forwarded when received, to all beneficiaries for their own accounting.


Re: Land trusts and taxes - Posted by John(NH)

Posted by John(NH) on April 08, 1999 at 09:33:03:

Great answer! Here’s a followup though:
If the new beneficiary is using the property as his personal residence, and puts on his schedule A the 1098 was reported to Mr. Mortgage Payor, how does he prove he has interest in the property? What does he send the IRS? A copy of the transfer of beneficial interest? A copy of the cancelled checks? A note from Mr. Mortgage Payor?

Re: Land trusts and taxes - Posted by Bassman

Posted by Bassman on April 08, 1999 at 07:23:06:

Bill ,
Forgive me if i sound confused here , but it sounds like you are saying that the Trustee has Equitable interest in My property. I thought the job of a trustee was to do as the beneficiary directs them to.
If I am paying the note , as benificiary , why does the trustee have the tax benefits and not me?
And if the trustee has the equitable interest , how is it possible that I can fire him /replace him at my discretion?If I choose not to pay my trustee , how does he have equitable interest in My property?
The way you wrote your response sounds like it would be better to be a trustee then the benificiary.
Please correct me if I am confused as it is early in the moring.

Re: Land trusts and taxes - Posted by Bronchick

Posted by Bronchick on April 08, 1999 at 13:08:38:

He sends nothing. If he is audited, he shows the trust agreement to the IRS auditor.