A recent U.S. Tax Court case (Frank Aragona Trust v. Commissioner) has shed some light on whether or not trusts may be eligible to deduct losses from real estate activities in full, or if these losses have to be suspended under the “passive activity rules”. 

A passive activity can either be a business in which one does not materially participate, or a rental real estate activity. The tax consequences of whether or not an activity is considered passive or “nonpassive” can be significant. 

The passive loss rules (generally speaking) state that losses from these types of activities can only be deducted against passive income from other passive activities, and not against income from wages, investment income, and other nonpassive types of income. Losses from these activities that are not absorbed against income from other passive activities are suspended, and carried forward until there is either passive income against which to absorb it, or upon disposition of the activity, in which case any accumulated suspended loss from that activity is allowed as a deduction.

Click here to learn more about passive activity rules and how they relate to your Trust.