Grantor trust reporting and allocation of income property expenses

[Don-CNY]

I have seen online and been told by both a CPA and our trust attorney that certain expenses for our rental properties can be paid by our irrevocable grantor trust (property taxes, insurance, improvements expenses). However, we have other expenses (mortgage taken out in our names, utilities, misc. services, etc.) that are not on that list.

This has not been an issue in the past, as the trust had no liquid assets, so we personally incurred all of the expenses. However, we are selling one of our two rental properties this year, so the trust would then have funds to pay for allowable expenses. That obviously would be a benefit to us as we would not be paying those from our own funds. But I do not understand how we would document/report expenses paid by the trust vs. those we pay. It would seem that we would have to port some info from the trust's Schedule E to ours, but I don't know if that's correct or possible, as I don't have the TT Business Edition. 

[tagteam]

Is this actually a grantor trust? 

A grantor trust is disregarded for federal income tax purposes.

[Don-CNY]

Yes, it is a grantor trust. As such I have been submitting a schedule E for the rental properties as part of our personal return. But we have previously been paying for improvements, maintenance, property tax and insurance from our own funds. When we sell the one property the trust will have funds in it, not just property. I have been advised by both our trust attorney and a CPA that the trust can pay rental expenses, but I do not understand how that is properly reported, especially as nobody has indicated that our personal mortgage can be deducted. That means expenses would be partially paid by us and partially by the trust.

I have always done our taxes, and I worked in the past for both Turbotax online support and Jackson-Hewitt, but this is an entirely new area for me. I keep getting bounced between my attorney and CPA, so I thought I'd try here before going back to them again. 

[tagteam]

Are you aware that the trust would generally be disregarded for federal income tax purposes?

Also, there are optional reporting methods.

See https://www.irs.gov/instructions/i1041#en_US_2021_publink1000286018

[Don-CNY]

Yes, I'm aware of that - again, I've been reporting the tax-related activity on our personal return for that reason. I already looked at the alternative methods and they don't address my questions.

[tagteam]

What are your questions? Secondarily, why is your attorney or accountant unable to provide answers?

The trust (as a grantor trust) is indistinguishable from you for federal income tax purposes. As a result, it is irrelevant as to whether the trust paid for any expenses incurred or you paid out of your personal funds (which are actually the same as far as the IRS is concerned).

[Don-CNY]

My question comes down to how I bot pay for expenses and report them on my taxes. I don't know if I'm not asking the right questions or they don't understand them. Your 2nd paragraph would seem to answer my question - making it more clear as to what "disregarded" means. But it's hard for me to believe that the trust is that large a benefit to me, because that would mean that I can have the trust pay at least some rental expenses and I can deduct them from my own taxable income. I'm hoping to provide some more clarity for those assisting me here and confirm things. I cannot afford to make a mistake with this. Thank you for your input. 

[tagteam]

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@Don-CNY wrote:

But it's hard for me to believe that the trust is that large a benefit to me, because that would mean that I can have the trust pay at least some rental expenses and I can deduct them from my own taxable income.

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Except in this instance the trust paying the expenses and you paying the expenses are the same. 

The trust does not get to deduct the expenses once and then you get to deduct the same expenses (again) on your return; the expenses only get deducted once and that would be by you on your return.

[Don-CNY]

Yes, I thought that's what I said - the payment comes from the funds in the trust but I deduct it on the Sched E.

[tagteam]

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@Don-CNY wrote:

Yes, I thought that's what I said - the payment comes from the funds in the trust but I deduct it on the Sched E.

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Correct, the funds in the trust belong to you at this point for the purposes of federal income taxes.

[Critter-3]

YOU and the TRUST are one and the same on a federal tax return so all the income and expenses go on the Sch E no matter where the payment comes from  ... it is like you having one pair of pants ... no matter which "pocket" the money comes out of it is still from the same pair of pants.  This trust doesn't file it's own tax return ... all it's income is reported on yours hence the "disregarded entity" status.