How to File Income Taxes for a Land Trust

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A land trust is simply an ordinary trust with assets that are primarily real estate. If the grantor is still alive and the trust is revocable, all trust income will be treated as the grantor's own income, and the trust doesn't need to file a tax return. If the trust was created as an irrevocable trust, or if the grantor is dead, the trustee must file a special trust tax return on behalf of the trust.

  • Gather together all of the trust's financial records. Determine if trust income during the tax year exceeded $600. If not, the trust does not need to file a tax return.

  • Download Form 1041 and Schedule K-1 from the IRS website (see Resources). Use the version of Schedule K-1 that was designed to be used with Form 1041 -- several versions of Schedule K-1 exist.

  • Report the trust income from rent if tenants live on the land. You need only report income that the trust actually received, not money that is owed to it.

  • List capital gains or losses. A capital gain or loss will typically occur for a land trust when the trust sells a portion of the land at a price different from the initial purchase price. Mere appreciation of the market value of the land is not considered a capital gain unless you sell the land to realize the gain.

  • Report any other income that the trust received during the tax year, even if it is not directly related to land held by the trust -- for example, dividends received from corporations the trust holds shares in.

  • Apply any deductions the trust is eligible for -- trustee fees, legal expenses and property taxes, for example. Calculate the trust's taxable income, and use the tax table in the Form 1041 instructions to find the appropriate tax rate. Calculate the total tax, and subtract any taxes already paid to determine the total tax due.

  • Complete Schedule K-1 to report any distributions to beneficiaries. Prepare one copy to the IRS with Form 1041, one copy for trust records, and one copy each for every beneficiary who received a distribution from the trust during the tax year.

  • Send Form 1041 to the IRS address listed on the Form 1041 instructions along with Schedule K-1 and the tax due. Distribute copies of Schedule K-1 to beneficiaries.

Tips & Warnings

  • If the grantor of an irrevocable trust treats trust assets as his own, such as by writing checks on the trust bank account, the IRS might tax the grantor personally on trust income.

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