Trust Depreciation allocation - amount to beneficiaries vs. amount to trust.

[Savi1]

Trust Depreciation allocation - amount to beneficiaries vs. amount to trust. If I allocate the depreciation on my rental 1041 schedule e to beneficiaries, what would happen to the depreciation amount on the rental? Will it be taxed when I sell it. What is the difference between the two and how can I benefit one of the beneficiaries, since she is getting 100% of the income earned and in charge of all the expenses? Thank you.

[view2]

Depreciation.   For a decedent's estate, the depreciation deduction is apportioned between the estate and the heirs, legatees, and devisees on the basis of the estate's income allocable to each.

  For a trust, the depreciation deduction is apportioned between the income beneficiaries and the trust on the basis of the trust income allocable to each, unless the governing instrument (or local law) requires or permits the trustee to maintain a depreciation reserve. If the trustee is required to maintain a reserve, the deduction is first allocated to the trust, up to the amount of the reserve. Any excess is allocated among the income beneficiaries and the trust in the same manner as the trust's accounting income. See Regulations section 1.167(h)-1(b). 

http://www.irs.gov/instructions/i1041/ch02.html#d0e3247

Scroll down to Depreciation and Depletion for example.

http://taxmap.ntis.gov/taxmap/pubs/p559-003.htm

[bretsharon]

Does this mean then, that a cash account is setup in principal's books holding cash for the Depreciation Reserve?  Do you know of a treatise that addresses this?  I have never found more than a few lines like you sent.  So does this mean that DNI still includes all the depreciation and the beneficiary gets to deduct on their Sch K-1s

[tagteam · Accepted solution]

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@bretsharon wrote:

Does this mean then, that a cash account is setup in principal's books holding cash for the Depreciation Reserve?  Do you know of a treatise that addresses this?  I have never found more than a few lines like you sent.  So does this mean that DNI still includes all the depreciation and the beneficiary gets to deduct on their Sch K-1s

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@bretsharon 

EDIT: You are responding to a very old thread.

Depreciation deductions are typically allocated between the entity and the beneficiaries based on the income allocable to each.

See https://www.irs.gov/instructions/i1041#idm140366309841280

Depreciation.

For a decedent's estate, the depreciation deduction is apportioned between the estate and the heirs, legatees, and devisees on the basis of the estate's income allocable to each.

For a trust, the depreciation deduction is apportioned between the income beneficiaries and the trust on the basis of the trust income allocable to each, unless the governing instrument (or local law) requires or permits the trustee to maintain a depreciation reserve. If the trustee is required to maintain a reserve, the deduction is first allocated to the trust, up to the amount of the reserve. Any excess is allocated among the income beneficiaries and the trust in the same manner as the trust's accounting income. See Regulations section 1.167(h)-1(b).

[bretsharon]

Yes, I know all of this, but I am talking about the bookkeeping.  It looks like there are 2 (or more) alternatives:

(1) When cash comes in, you take, say 10% of the Revenue, that is, If gross revenue is $100,000, so I will take $10,000 and allocate it to Principle in a separate cash account from the cash account for Income.  You also deduct depreciation from the Fiduciary Accounting Income as well.  I assume taxable income will deduct the balance as DNI.

or

(2) Do you just deduct the amount allocated to principal and not take the cash?  Do you set up an account for the Principal, and add the Depreciation Reserve as income?

I find nothing in the references that addresses any where near about what I am asking.

[tagteam]

FAI is actually unique and more of an accounting, not a tax, concept.

See https://www.journalofaccountancy.com/issues/2010/oct/20102933.html and

https://resources.taxschool.illinois.edu/taxbookarchive/2010/2010%2007%20Estate%20and%20Trust%20Taxa...

[bretsharon]

Thank you.  The Illinois publication helps.  I must look and see if the cash in the amount of the reserve is actually put in a principal cash account.  It might be that it does nothing to do with cash but is buried in the principal retained earnings, implied by the computation on Page 18, but I am still looking.  As I understand it, FAI determines what gets currently distributed to the the beneficiary, then DNI, is computed from FAI, and then DNI Deduction is derived from DNI..    DNI can't exceed FAI..  Income Taxation of Trusts and Estates, Acker, Carolina Academic Press 2020 Page 143 says, "...fiduciary accounting income is an important metric for ascertaining distribution deductions.  In other words, if you do not know the amount of fiduciary account income, you cannot determine the correct distribution deduction."

I try to an excel sheet, to help me get more confused than usual...

[tagteam]

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@bretsharon wrote:

I try to an excel sheet, to help me get more confused than usual...

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I understand. Perhaps the information at the link below will also be of some utility.

https://www.thetaxadviser.com/issues/2015/sep/reporting-depreciation-when-trusts-own-business-entiti...

[bretsharon]

Thank you.  Charles Rounds, Jr of "Loring: A Trustee's Handbook" cited me to the "Uniform Fiduciary Income and Principal Act" July 26th, 2020 §503, actually uses the term, " (b) A fiduciary may transfer to principal a reasonable amount of the net cash receipts from a principal asset that is subject to depreciation, but may not transfer any amount for depreciation:"  which is the only source I have found that actually says, CASH, and even better it says NET!!!.   I am easily amused and don't get out much......    Still the words after net cash receipts confuses me further....