“How is a Land Trust taxed?”

I am often challenged on whether a Land Trust has to file a tax return or not. Some “professionals” insist that I am wrong when I say that a Land Trust does not file a tax return and does not obtain a FEIN number with the Internal Revenue Service (IRS).

Attorneys, accountants, and other professionals try to tell me (and their clients) that if you put your property into a Land Trust the Trust will have to file a return with the IRS. The problem is that most professionals are used to other kinds of trusts (that do have to file a tax return) and not the Illinois “Type” Land Trust.

There are two main issues regarding Land Trusts and Taxes

The state tax issue is that not all states are the same when it comes to taxation. You will need to talk to your account about your state’s laws.

In Illinois: Compensation received by a non-resident from sources in Illinois is not subject to the Illinois income tax if the state of the Beneficiary’s residence provides a reciprocal exemption to residents of Illinois (Ill. Rev.Stat., c 120, 3-302(b)). If a non-resident beneficiary of a Land Trust holding title to the property in Illinois lives in a state which provides such an exemption and the operation of the property can be so constructed that a salary or other compensation is paid to their/them may be able to avoid Illinois income tax on that income.

The Federal taxation of a Land Trust Beneficiary’s income the United States Treasury Regulations Sections1.671-4, 1.6012-3(a)(9), and 301.6109-1(a)(2) provides that where a person. A Land Trust is a pass-through entity in the eyes of the IRS. In fact, the IRS does not even consider a Land Trust to be a Trust at all . . . for tax purposes (see Revenue Ruling 92-105). According to IRS Code Section 677, a properly structured Land Trust should be classified for income tax purposes as a Grantor Trust.

All income and deductions flow through the trust to the Beneficiaries in amounts proportionate to their respective interests in the trust corpus. It’s not to say that all Land Trusts ARE Illinois Land Trusts, just that they are “like” an Illinois Land Trust. So, how is a Land Trust taxed? No matter what state you form your Land Trust in, a federal tax return is NOT required.

For you skeptics out there, here is the section of the IRS code that deals with this subject (See Revenue Ruling 92-105 and IRS Code Section 677).

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