1. From what I understand, the transfer of the rental properties constituting the corpus/principle directly to the beneficiaries, is not taxable and does not constitute income and is not reportable on form 1041 or form K-1 or elsewhere?
The distribution of corpus is not taxable to the beneficiaries. The Trustee may have discretion in designating all or part as an income distribution. This might be done to avoid taxes at the trust level which are generally higher thna taxes at the individual level.
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2. As to the rental property transferred into the trust by the court and listed in the trust document, that is also trust principle/corpus? Am I correct in thinking that the proceeds from the sale at exactly the property value on the date of death, without gain or loss, does not constitute income or loss needing to be reported on form 1041 or beneficiaries' K-1's, but simply converted the real property principle to cash principle. In other words, the sale proceeds retain their status as principle, there being no income or loss? And, being principle and not income or loss, is not reported on form 1041. I also note that there is no place on form 1041 to report the conversion of real property corpus to cash corpus--only to report income, had there been any gain above the corpus basis?
the sale needs to be reported on the 1041 and its likely there is actually a loss when selling expenses (closing costs) are taken into account. Property value on date of death would not take into these expenses such as title charges, transfer taxes that are chargeable to the Trust (seller).
selling the house is no different than selling stock that the trust owned.
