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Tax Court Reduces Obamacare 3.8% Medicare Surtax Bill for Irrevocable Trusts with Rental Real Estate Investments

March 31, 2014 Business & Tax Blog Medicare Tax

If your family has an irrevocable trust holding closely-held rental real estate investments, a recent Tax Court case may help the trust reduce its Obamacare 3.8% Medicare Surtax bill. It may also help trusts use rental real estate losses to offset other income by avoiding the “Passive Activity Loss” limitations.

The Internal Revenue Service had argued that trusts could not use the same 3.8% Medicare Surtax and Passive Activity Loss planning techniques as individuals respect to rental properties, because trusts could not perform “personal services” in a real estate business to become a “real estate professional” as is necessary for the planning. The Tax Court disagreed, holding a trustee’s time devoted to such activities could satisfy the relevant tests. 

We have previously written about 3.8% Medicare Surtax avoidance techniques for individuals who own closely-held businesses. Here is a link: 2013 Federal Income Tax Return “Regrouping” Election Can Permanently Reduce Exposure to the New 3.8 percent Medicare Surtax. These techniques, which require active planning, are now available for irrevocable trusts as well.

Here is a link to a more detailed explanation of 3.8% Medicare Surtax planning for real estate investors: Medicare Surtax Planning for Real Estate Investors and Developers

E. John Wagner, II