How a trust qualified for an exception to PAL rules

Description

Abstract: In a favorable decision for trusts that hold real estate assets, the U.S. Tax Court has held that such a trust qualified for the real estate professional exception and was therefore exempt from the limitations on passive activity losses (PALs). The court’s holding also means the trust can avoid the new 3.8% net investment income tax (NIIT) that applies to passive activity income. This article discusses how the Tax Court held that the activities of the trustee employees should be considered, noting that trustees aren’t relieved of their duties of loyalty to beneficiaries just because they conduct activities through a corporation wholly owned by the trust. A sidebar explains why two trustees’ minority interests didn’t undermine the trust’s material participation in the real estate operations.