Since the home was in the trust, sold by the trust and funds placed in the trust bank account until distribution there really is a need to file the trust return. Income of $600 or more meets the filing requirement of the trust (Form 1041). The fact that the home sold for $50,000 is income. Filing shows the IRS the cost basis that eliminates the income and actually creates a loss. In the process you can also include estate expenses.
The loss is then distributed to the beneficiaries and if it was not their home, each will have a capital loss to report on their tax returns.
Even if one or more of the beneficiaries 'cannot use the loss' it is carried over until it is used up.
- Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.
- Form 1041 Instructions (click the link)
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