Are these Fees Tax Deductible?

Question

I own several RE Rentals deeded in a Revocable Living Trust (my wife and I as Trustees).  I also own several Notes and other investment assets in a Holding Company LLC.

I also own an Operating/Service Company (which is a Partnership LLC) that provides all the financial and administrative management services for both the RE Rentals in the Trust and the Notes/Investments in the Holding Company.  These services include all the bookkeeping, taxes, correspondence with insurance, banks, lawyers, agents/brokers, property managers, HOA's, mortgage companies, etc.

For managing all these financial and administrative services, I as Trustee of the Trust pay a monthly fee to the Operating/Service Company.  My Holding Company also pays a monthly fee to the Operating/Service Company for the same.

My question is about the fee paid from me as Trustee to the Operating/Service Company...is that fee a tax deductible expense for the RE Rentals (e.g., similar to property management or professional fees)?  OR...would it only be deductible on my Schedule A, since I own the Rentals in my Trust, and thus subject to the 2% AGI rule?

OR...is there something totally different that I'm not asking/considering here?

Thanks

Christopher Smith · Answer

A Revocable Living Trust is typically treated as totally transparent for federal income tax purposes so the grantor is treated as if he or she owned the rental property assets directly for such purpose.

Since this is a controlled party transaction, the management service expense would likely also be subject to an arms length or reasonable compensation standard.