Can a Trust Qualify as a Real Estate Professional? Living Trusts, Non-Grantor Trusts, and the Aragona Case

The answer depends on what kind of trust holds the property.

If your rentals sit in a revocable living trust, the trust is ignored for income tax. You report the rentals on your own return, and real estate professional status turns on your own hours, just as if you owned the properties in your name.

If the rentals sit in a non-grantor trust, the trust is its own taxpayer. The Tax Court held in Frank Aragona Trust v. Commissioner, 142 T.C. 165 (2014), that a trust like that can qualify as a real estate professional through the work of its trustees. The IRS still reads the rules more narrowly, and Treasury has never written regulations for trusts.

This page is part of our REPS and passive losses series.

Living trusts: nothing changes

A revocable living trust is a grantor trust. The 2025 Instructions for Form 1041 say so directly, because you can change or end the trust at any time. Under IRC §§671 and 676, you are treated as the owner, and the rental income and losses go on your Form 1040.

The same instructions say that for a grantor trust, material participation is determined at the grantor level. So the trust does not need to meet any test. You do.

In practice that means:

• Your hours count toward the 750-hour test and the more-than-half test the same way they would without the trust.
• On a joint return, one spouse still has to pass both REPS tests alone. See spousal real estate professional status.
• Your grouping election, your time log, and Schedule E line 43 work the same way. See the REPS grouping election.

Some irrevocable trusts are also grantor trusts for income tax. The same grantor-level rule applies to them. Whether a particular irrevocable trust is a grantor trust depends on its terms, so we read the trust document before we answer.

Non-grantor trusts: what Aragona decided

A non-grantor trust files its own Form 1041 and pays its own tax on income it keeps. Section 469 applies to it directly. A trust's rental losses are generally passive unless the trust can use the real estate professional exception in §469(c)(7).

The Frank Aragona Trust owned rental property and ran other real estate businesses in Michigan. It had six trustees. Three of them worked full time for an LLC the trust wholly owned, and that LLC managed most of the trust's rentals.

The IRS made two arguments. First, it said a trust cannot perform "personal services," because Treas. Reg. §1.469-9(b)(4) defines them as work performed by an individual. Second, it said the trust did not materially participate.

The court rejected both:

• A trust can be a real estate professional. Trustees are individuals. Work they do on behalf of the trust can count as personal services performed by the trust.
• Trustee work counts even when it is done as an employee. The court counted the three trustees' work for the trust's LLC. Michigan law required them to act in the trust's interest, and their employee role did not change that.
• Small side interests did not ruin it. Two trustees owned minority stakes in some of the same entities. The court still found material participation, because their stakes never exceeded the trust's and they ran the businesses day to day.

The court did not decide whether non-trustee employees' work counts. It found the trustees' work was enough. It also did not analyze the 750 hours or the more-than-half test in detail, because the IRS did not argue them.

Where the IRS still disagrees

There are no regulations on how a trust materially participates. Temp. Treas. Reg. §1.469-5T(g), the paragraph meant for trusts and estates, still reads "Reserved." The 2025 Form 1041 instructions say material participation standards for estates and trusts have not been established by regulations.

Without regulations, the IRS relies on 1986 Senate report language. It says a trust materially participates if a fiduciary, in that capacity, participates. The IRS applied that reading in two technical advice memoranda:

• TAM 200733023 (2007). Special trustees who could not commit the trust to anything without the regular trustees' consent were not treated as fiduciaries, so their hours did not count.
• TAM 201317010 (2013). The IRS again counted only work done in a fiduciary capacity. A special trustee with limited, delineated powers did not establish participation, and the IRS concluded the trusts did not materially participate.

Both memoranda came before Aragona. On the other side, Mattie K. Carter Trust v. United States, 256 F. Supp. 2d 536 (N.D. Tex. 2003), counted the work of a trust's employees and agents, not only the trustee.

Under §6110(k)(3), a technical advice memorandum cannot be used or cited as precedent. Aragona is a Tax Court opinion. Tax Court decisions can be appealed to a federal circuit court, and no appeals court has ruled on this question.

What a non-grantor trust needs to show

If a non-grantor trust holds your family's rentals and you want the losses to be nonpassive, plan around the narrower IRS view:

• A trustee who works in the business. The strongest facts in Aragona were trustees who worked full time in the trust's real estate operations.
• Real authority. The trustee doing the work should hold actual discretionary power under the trust document. A "special trustee" with no power to bind the trust lost in TAM 200733023.
• A time log kept as trustee. Record the date, the task, the hours, and the property, and note that the work was done for the trust. See how to keep a REPS time log that holds up.
• Both REPS tests at the trust level. The trust still needs more than 750 hours and more than half of its personal services in real property trades or businesses it materially participates in.
• Material participation in the rentals themselves. That is a separate step. The grouping election can help a trust with several properties.

Rules that work differently for trusts

No $25,000 allowance for most trusts. The $25,000 special allowance for active participation in §469(i) applies only to natural persons. A decedent's estate gets it for tax years ending less than two years after the date of death, under §469(i)(4). The Form 8582 instructions add that a qualified revocable trust can elect to be treated as part of the estate for this purpose. The trustee and the executor, if there is one, make that election on Form 8855. See material participation vs active participation.

The 3.8% tax starts much sooner. Under §1411(a)(2), a trust owes the net investment income tax on the lesser of its undistributed net investment income or its adjusted gross income above the point where the top bracket starts. For 2026, Rev. Proc. 2025-32 puts the top trust bracket at taxable income over $16,000. An individual's threshold is $250,000 on a joint return. Whether the trust's rentals are passive can change the trust's NIIT. See real estate professional status and the net investment income tax.

Distributing the property can cost the losses. If a trust distributes an interest in a passive activity, §469(j)(12) adds the suspended passive losses to the property's basis, and those losses are never deductible. Selling the property in a taxable sale is the usual way to free suspended losses. See what happens to suspended passive losses when you sell.

A closely held C corporation has its own test. Under §469(c)(7)(D)(i), it qualifies if more than 50% of its gross receipts come from real property trades or businesses in which it materially participates. That rule is in the statute. The trust rule comes from case law.

California

California does not follow federal REPS for anyone. The FTB's 2025 Instructions for Form FTB 3801 say California did not conform to §469(c)(7) and that all rental activities are passive for California purposes. Trusts figure their California passive losses on Form FTB 3801, the same as individuals. A trust that wins nonpassive treatment federally under Aragona still has passive rentals in California. See does California recognize real estate professional status.

Common mistakes

• Assuming a living trust needs its own REPS analysis. It does not. Your hours are what count.
• Counting a non-trustee property manager's hours for a non-grantor trust and expecting the IRS to accept it.
• Naming a "special trustee" with no real power and treating that person's log as the trust's.
• Claiming the $25,000 allowance on a trust return.
• Distributing a rental with large suspended losses out of a trust without running the numbers first.
• Carrying federal nonpassive treatment onto the California return.

Frequently asked questions

Can a trust be a real estate professional?

Yes, in the Tax Court. In Frank Aragona Trust v. Commissioner, 142 T.C. 165 (2014), the court held that a trust can qualify under §469(c)(7), and that work its trustees perform for the trust counts as the trust's personal services. The IRS has not issued regulations on this, and it applies a narrower reading in its own guidance.

Does putting my rentals in a living trust affect real estate professional status?

No. A revocable living trust is a grantor trust, so it is ignored for income tax. You report the rentals on your own return, and the 2025 Form 1041 instructions say material participation for a grantor trust is determined at the grantor level. Your own hours decide whether you qualify.

Whose hours count for a non-grantor trust?

Trustees' hours count when they work for the trust, including as employees of a business the trust owns, under Aragona. The court did not decide whether non-trustee employees' hours count. The IRS position in TAM 200733023 and TAM 201317010 counts only work done in a fiduciary capacity by someone with real authority.

Can a trust use the $25,000 rental loss allowance?

Generally no. Section 469(i) limits the $25,000 allowance to natural persons. A decedent's estate can use it for tax years ending less than two years after death, and a qualified revocable trust can elect on Form 8855 to be treated as part of the estate for that purpose.

Does a trust pay the 3.8% net investment income tax?

Yes, if it keeps the income. Under §1411(a)(2), the tax applies to the lesser of undistributed net investment income or adjusted gross income above the start of the top trust bracket. That bracket starts at $16,000 of taxable income for 2026 under Rev. Proc. 2025-32.

Does California recognize real estate professional status for trusts?

No. California did not conform to §469(c)(7), and the FTB 3801 instructions say all rental activities are passive for California purposes. A trust's California rental losses stay passive even when the federal return treats them as nonpassive.

Talk it through with us

Bring the trust document, the last two years of Form 1041 or Form 1040, the rental list, and any time logs the trustees or you keep. We will tell you whether the trust is a grantor trust, whose hours count, and what the losses look like on the federal and California returns. Book a complimentary consultation.

LaviCPA is a Los Angeles CPA firm for real estate investors. Shawn Lavi, CPA, is the firm's principal. Elias Lavi, CPA, is its founder and co-owner.