Trust 1041 and Net Operating Loss NOL

[frank527]

Using TurboTax Business to file a post death 1041 for a Trust created by a Parent decades ago. The grantor trust includes securities and a house. Last year there were losses from sale of securities, real estate taxes, attorney fees and administrative costs, all of which created a loss and some was reduce by a capital loss carryforward for the securities. However, there is still a substantial loss. The trust is not in its final year. Even if possible to spread the loss to the thru a K-1, trust issues would prevent passing the loss to the beneficiaries at this time.

Is the Trust’s “business” holding and maintaining securities and real estate to qualify as an entity qualified for the NOL? If the trust qualifies, what form does the trust use to show the NOL. If no special form, how noted on the 1041? Must it be carryforward or back? TurboTax did not generate any form or note any option or note any opportunity, pro or con. Been searching and reading IRS pubs, including 536, but confused.

Thanks for any help.

[gloriah5200]

If the trust is maintaining a capital loss carryforward on it's investments from prior years, then apparently the investments are not considered its "business".

Capital losses are maintained at the trust level until the final year grantor trust return.

If a grantor trust is operating a business then it is generally operating the business left behind of the grantor at death to be operated and managed until liquidated.

Capital losses.

Capital losses are netted against gains at the entity level except for a gain used under item (3), Other exceptions, in determining the amount distributed or required to be distributed to a beneficiary.

Capital losses are allocated to the entity except in the year the estate or trust terminates.

If losses are more than gains, the smaller of the net loss, or $3,000, can be deducted on line 4, Form 1041.

Losses can be carried forward indefinitely. In the year an estate or trust terminates, any loss that would be carried over to the next year can be distributed to beneficiaries.

For additional information, please refer to the following link:

The Tax Book Deluxe

For additional information on preparation of the trust return, please refer to the following link:

IRS Instructions for form 1041

[Anonymous_]

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@frank527 wrote:

Is the Trust’s “business” holding and maintaining securities and real estate to qualify as an entity qualified for the NOL? 

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No, those activities are investment activities; they would not be considered a "business", the fact that the assets are held in a trust notwithstanding (i.e., merely because the assets are held in a trust does not elevate their status).

Trusts can certainly have an NOL, but only from actual business activities, such as operating a trade or business (commonly a sole proprietorship), farming, or the sale of rental property. 

[frank527]

Thanks for the info. Kinda figured. Perhaps while some issues are worked out, we may rent out the house. Maybe then it would qualify for a NOL, if applicable, and other issues.

Thanks again.

[sphannan]

You mentioned real estate taxes. I would assume you also have insurance. An IRC Section 266 election can be made to capitalize these and other 'Investment Expenses'.

[Anonymous_]

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@sphannan wrote:

You mentioned real estate taxes. I would assume you also have insurance. An IRC Section 266 election can be made to capitalize these and other 'Investment Expenses'.

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Those expenses have to be otherwise be deductible in order for an election to be made to have the expenses treated as capital items. 

An expense for insurance on a home that is not held for production of income (e.g., rental or appreciation) would not qualify for the election (i.e., the expense would not otherwise be deductible).