Inherited real property still in EIN grantor trust

[oggiejax]

Our father died 5 years ago. 

His home and assets remain in his  trust which was assigned an EIN after his death and 1041 is prepared each year. 

The home is intended for passive income but needed extensive repairs and has accumulated a huge carry forward loss.

As trustee and owners, but not the grantors, can we transfer another of our passive income properties into the trust to absorb the carry forward loss or would that constitute ownership change since the trust has an EIN?

We are both recorded with the county assessor's office as rightful owners.

As trustee I have authority to aquire assets for the trust. 

Thanks, 

[Anonymous_ · Accepted solution]

Both of you is who?

Despite the fact that you were not the original grantors does not necessarily mean the trust is not a grantor trust. If you (both) actually own the asset(s), as a result of having certain powers granted to you by the terms of the trust, then you can essentially do what you desire.

I would recommend seeking guidance from a local professional who can review the terms of the trust.

[oggiejax]

We are the children who inherited. 

For simplification purposes,  assume the trust allows the trustee full discretion. 

A local CPA has advised that because the property is still in my father's trust , we would lose the passive loss carry forward when transferred into our names and I just don't buy that, and I need to figure out a way to use up this carry forward loss.

[Mike9241]

When an estate disposes of a passive activity, the estate is permitted to deduct suspended or unused passive losses, i.e., those it has previously not been allowed as deductions. Generally, the distribution of passive activity property would not be a taxable event. In the case of a distribution of passive activity property on termination of an estate, absent amendment to the Code, there seems to be no ability to pass through suspended losses to the beneficiaries. Depending on the facts, this might be an asset that should be distributed or sold prior to termination. 

as for transferring property into the trust that you own see a tax lawyer. the way i see it that would likely create tax problems because you would be the grantor, trustee and beneficiary and would as such might actually convert the trust to a grantor trust and lose those previous PAL. 

[Anonymous_]

A trust bypasses the estate so that component would be irrelevant.

[Anonymous_ · Accepted solution]

@oggiejax 

You need to consult with a local professional (tax or legal) since decedents dying with passive losses can create a rather complex situation (it affects basis).

See https://www.thetaxadviser.com/issues/2017/jan/carryovers-death-spouse.html

Passive activity loss carryovers: Suspended passive activity losses (PALs) must be traced to the owner of the activity. Under Sec. 469(g)(2)(b), any of the decedent's PAL carryovers are allowed on the final joint return for the year of death, as the activity is considered disposed of. However, the amount of carryover that can be deducted must be reduced by the excess of the basis of the property in the hands of the transferee (the heir) over the decedent's adjusted basis in the property just before death. In other words, the amount of loss equal to the step-up in basis at death is not allowed to the decedent or to anyone else because the heirs receive that tax benefit from the step-up in basis. If the decedent's PAL carryover is less than the step-up in basis, none of the carryover is allowed on the final return.

[oggiejax]

Thank you for the reply.

To clarify, this loss carryforward has been incurred AFTER the Grantor died, after we inherited the property, but while the property is still deeded in our fathers trust.  However, the county recorder and assessor were both notified of his death and we are listed as "owners" with the Ownership Department of the assessors office.

We have already been taking depreciation allowance, as if the property has changed ownership, which it has, except it is still in our fathers trust with an EIN.

I believe the link you suggested deals with loss carryforward incurred before the grantor died.

[oggiejax]

I am not a tax professional, but I believe that the answers I am receiving are assuming that the loss carryforward was incurred by the grantor, it was not, it has been incurred by the inherited owners after his death, but while still in the grantors trust with EIN.

The property was never taken out of his trust because it had an outstanding loan against it and we were told that the property could not transfer out of the trust without causing the mortgage company to call the note.

We inherited, received basis valuation, received exclusion from tax increase as parent/child, began taking depreciation allowance, but have made repairs while still in the trust, incurring loss carryforward.

I just want to know if when I do transfer this property's deed into our names as tenants in common that we can continue to claim the loss carryforward and accumulated depreciation.

A local CPA is telling me that I cannot assume the loss carryforward, but that makes no sense, especially when I will be able to assume the accumulated depreciation.

[Anonymous_]

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@oggiejax wrote:

A local CPA is telling me that I cannot assume the loss carryforward, but that makes no sense, especially when I will be able to assume the accumulated depreciation.

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The passive loss can be use post mortem but only in certain circumstances. 

Again, it has the potential to impact the basis at that point. 

The loss can possibly be used as an offset on the decedent's final return. If there is a carryforward, then the rules cited previously are applicable.

[oggiejax]

This loss was not incurred by the grantor.

This loss has accumulated by repairs made to the property after basis was established and the assessor's office was notified of ownership change to the inherited party.

It had effectively changed ownership, but remains in the grantors trust, because we were told that transferring it out of the trust would cause the mortgage company to call the note.

[Anonymous_]

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@oggiejax wrote:

This loss was not incurred by the grantor.

This loss has accumulated by repairs made to the property after basis was established and the assessor's office was notified of ownership change to the inherited party.

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That would be entirely different. In that event, passive losses in the trust could be used to offset passive income.

Upon a sale of the property (to an unrelated third party in a taxable transaction), the suspended passive losses are released.

[oggiejax]

Thank you,

So, when I eventually transfer the deed out of the trust and into our names, I can assume the depreciation and loss carryforward onto our returns?

If we ever sell it, then any accumulated loss carryforward still unused would offset any capital gains, at that point?

[Anonymous_]

Yes, the beneficiaries of the trust would assume the basis in the hands of the trust with respect to an in-kind distribution of the property.

[oggiejax]

I thank you for your help and sorry for being so dense, but your last response confused me.

I am simply trying to transfer that carryforward loss with the property out of the trust and into our names and continue to offset that loss against other passive income properties in our names.

A local CPA has suggested that I cannot use that carryforward loss after the property transfers out of the current trust and that it would be lost, unless we sell to a third party.

Will that loss carryforward, that my brother and I incurred after we inherited, stay with the property even after it is transferred out of our father's EIN trust?

It doesn't make any sense that I wouldn't be able to use the loss carryforward just because the deed transfers into our names when we are already the owners as far as the assessor is concerned.

[Anonymous_]

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@oggiejax wrote:

A local CPA has suggested that I cannot use that carryforward loss after the property transfers out of the current trust and that it would be lost, unless we sell to a third party.

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Are you certain you understood the CPA?

The loss is suspended until you sell the property to a third party.