Can a Trust or Estate Buy Transferable Tax Credits?

Published October 29, 2026. Sometimes, but the credit is only as useful as the passive income tax it can offset. Trustees and executors also have fiduciary duties that an individual does not. This is a screening guide for the trust's CPA and counsel.

The tax profile

• Compressed brackets. For 2026, the 37% rate applies to trust and estate taxable income over $16,000 (Rev. Proc. 2025-32). Income retained in a trust is taxed at high rates quickly, which is why trusts look for tax reduction.
• Passive rules apply. IRS Publication 925 says the passive activity rules apply to individuals, estates and trusts other than grantor trusts. A purchased credit is treated as determined in connection with a trade or business and is subject to §469 (Treas. Reg. §1.6418-2(f)(3)). A credit from the passive rules is allowed only against tax on net passive income (§469(d)(2)); see §469 and transferable credits.
• Grantor trusts. A grantor trust's income is generally taxed to the grantor, so the analysis follows the grantor's own tax position, not the trust's.
• NIIT. The net investment income tax is not reduced by this credit. See purchased credits and NIIT.

Material participation and real estate

A non-grantor trust can materially participate through its fiduciaries. The Tax Court held in Frank Aragona Trust v. Commissioner, 142 T.C. 165 (2014), that a trust can qualify for the real estate professional exception when its trustees' work in the real property business is counted. The IRS has signaled that it reads the case narrowly, so treat it as fact-specific. Qualifying cuts both ways: it can free rental losses, but rental income that is no longer passive can no longer support a purchased credit, because the credit offsets only tax on net passive income. Read real estate professionals and purchased credits.

Fiduciary checklist

1. Confirm the trust instrument and state law permit the transaction and who decides.
2. Estimate net passive income and the federal tax attributable to it (how to document it).
3. Size any purchase to the allowed credit, not to the whole tax bill; remember at-risk rules.
4. Weigh the cash cost, the discount and the diligence cost, and keep a written record of the analysis.
5. Ask counsel how credits and tax attributes relate to distributions and beneficiaries; do not assume a credit passes through to them.
6. Complete the election statement and Form 3800 / Form 8582-CR steps.

For W-2 income held personally, see why wages cannot be offset.

Educational information only, not tax, legal or investment advice, and no outcome is promised. Figures and rules were checked against the cited sources on October 29, 2026; confirm with your CPA and counsel before acting. See our disclaimer.