Tax Implications with a Title Holding Trust

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Pass-Thru Entity and Disregarded Entity

The Title Holding Trust is a fully revocable grantor trust just like a standard living trust, and as such is classified as a "pass-thru" entity.  Revenue, expenses and depreciation are passed thru and reported directly on the beneficiary’s own income tax return.

Title Holding Trusts are also considered "disregarded entities" for income tax purposes.  Disregarded entities are disregarded or ignored for income tax purposes.  The real or personal property owned and held in the Title Holding Trust is treated as if the property is owned directly by the beneficiaries of the trust for income tax purposes.  Title Holding Trusts do not file separate income returns and do not obtain separate taxpayer identification numbers.  The beneficiaries’ taxpayer ID number would be used instead.

Tax Free Exclusion on Sale of Primary Residence

Taxpayers who own and hold title to their primary residence in a Title Holding Trust will still qualify for the $250,000 or $500,000 tax-free exclusion under Section 121 of the Internal Revenue Code upon the sale of their home. 

Tax Deferred Exchange on Sale of Rental or Investment Property

Investors who acquire and hold rental or investment property or property used in their businesses in a Title Holding Trust will still qualify for 1031 tax deferred exchange treatment under Section 1031 of the Internal Revenue Code when they sell and acquire replacement property through a 1031 exchange.  The Internal Revenue Service provided guidance in Revenue Ruling 92-105. 

Estate and Gift Taxes

Income tax liabilities such as estate taxes (inheritance taxes) or gift taxes can not be avoided by contributing real or personal property into a Title Holding Trust. 

Assignment of Beneficial Interest

A common fallacy or myth is that the use of a Title Holding Trust will allow you to get around the payment or assessment of Federal and/or state income taxes, property taxes, documentary transfer taxes, reassessment of property values for property tax purposes, sales and use taxes, rental license taxes, intangible personal property taxes, and similar tax consequences. This is completely false and absolutely not true.  The use of a Title Holding Trust or Land Trust will not avoid any taxes or assessments that would otherwise be due and payable. 

It is extremely important to remember that the assignment by a beneficiary of a portion or all of their beneficial interest in a Title Holding Trust is considered to be a conveyance or transfer (sale, exchange, gift or other disposition) of the same percentage interest of the underlying property held in the Title Holding Trust and will have some type of tax consequences. 

FIRPTA

Foreign persons may acquire and hold real estate through a Title Holding Trust.  However, the underlying beneficiaries must still comply with the Foreign Investment in Real Property Tax Act (FIRPTA) when they sell, exchange, gift or otherwise dispose of the beneficial interest in the Title Holding Trust.

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