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I am the trustee of a irrevocable trust. This trust doesn't earn any money (I think). It was created to own three houses that would have otherwise been in my mother's name. Her health is not great, and these homes are the only wealth of our family, so we put them in a trust to prevent estate recovery should she spend time in assisted living at the end of her life.

The trust barely has enough money to take care of the homes. One of the homes is being "sold" to my brother over time. The payments he makes are far below fair market value.

The only other income to the trust is a small amount of investment returns: part capital gains and part interest, limited to far less than 10k in any year.

My accountant has suggested that I do not need to file a tax return. Apparently, since the "contract" with my brother to buy the house over time is based on payments that are below market value, this does not count as income.

I assume then that the only income of the trust, is the 6k or so from investments. The single person threshold is 13k. I know that a trust is like a person, so maybe this means I don't have to file?

But I saw this on the IRS page about who has to pay taxes. $400 of net income from self employment necessitates a filing. Am I subject to this rule? Is the investment income "self employment"?

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  • Just to clarify, even if the payments are below FMV, you may still have capital gains if the FMV is above tax basis. You need to find a better accountant, it seems.
    – littleadv
    Jan 22 at 22:22
  • Even for an individual (which a trust or estate is not) investment income is not employment income at all -- these are mutually exclusive categories -- and even more so not self-employment income. Jan 24 at 5:44

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A trust is not a person. Trusts file a different tax return using form 1041, and are required to file if they have (see instructions):

  • Any taxable income for the tax year;
  • Gross income of $600 or more (regardless of taxable income);
  • A beneficiary who is a nonresident alien; or
  • If you held a qualified investment in a QOF at any time during the year, you must file your return with Form 8997 attached. See the Form 8997 instructions.

So based on what you described, the trust matches the first two conditions and should file a return.

As to:

My accountant has suggested that I do not need to file a tax return. Apparently, since the "contract" with my brother to buy the house over time is based on payments that are below market value, this does not count as income.

I'd argue that the difference between FMV and the payment is a distribution to your brother. That would in fact make the payments from your brother "not income". How the disposition is treated for tax purposes is a different question, and you may need to account for the FMV for capital gains calculations (and then "deemed" distribution to your brother).

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  • Does the nature of the payment from my brother to the trust change anything? The truth here is that the property was being purchased from my mother via a hand written contract. In otherwords, they are mortgage payments of a very informal type. There was a hand written contract for that. when the property moved to the trust, we did not codify this in the trust document. It's word of mouth agreement. Does this change how the IRS views this "rent" or "mortgage" payment?
    – chad
    Jan 29 at 23:26
  • @chad you'll need to talk to an attorney, or at least a CPA/EA, about this. It's a bit more complex than DIY. Trust taxation is not a trivial topic to begin with, and you also have some legal complexities
    – littleadv
    Jan 30 at 0:17

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