K-1

[pattypuzzled]

I am preparing the final return for a Trust which has a carry-over capital gains loss from previous years.  We sold land in 2020 which resulted in a gain to the Trust on that sale, I distributed an equal portion of the proceeds of the sale to the 3 beneficiaries during 2020.  The gross proceeds did not eliminate the loss for the Trust.  Do I need to report the $22K on a K-1 for each beneficiary?  The Trust owned the land as a result of a death. 

[M-MTax]

Does the trust have a loss or not? Is this the final return for the trust? If there's a loss you can pass it through to the benes.

[SamS1]

@pattypuzzled Depends.  You indicated you sold some land that was in the Trust from a death.  At the date of death, the land should have received a stepped up basis to the market value at the time of death.  Make sure you have the correct basis for gain assigned to the land.  This could reduce the amount of gain.  If you had a capital loss carryover in the trust, this loss carryover should have netted against the capital gain from the sale of the land on the final 1041 return for the trust and the net gain/loss distributed out to the beneficiaries.  Example:  $20,000 capital loss carryover.  $60,000 gain on the land sale,  The net gain of $40,000 would be reflected on the K1 for each trust beneficiaries as capital gains.  The amount of cash the beneficiaries receive is not considered all income, only the net gain.   So if there is no capital gain or a capital loss after applying the carryover amount, that is what is reflected on the K1, regardless of the amount of cash they received.  If there are any trailing attorney or trustee fees, makes sure these are also distributed out as excess deductions on the K1.

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[pattypuzzled]

Thank you for your response.  There is a loss after the sale in 2020 which leaves a smaller loss for the Trust in 2020.  Never the less, it is still a loss.  I am under the impression the Trust will absorb the gain and since this is the final return I can equally distribute the remaining loss to the 3 beneficiaries listed.  Is that accurate?

[pattypuzzled]

Yes, with all the 2020 figures added the Trust still shows a loss.

[SamS1]

On the Trust return you would report the gain on sale on form 8949, which would flow to the 1041 Sch D, 8a, if long term gain.  On  1041 D line15, you would report the carryover loss, if its long term.  If the loss carryover is short term it would go on 1041 D line 6.  The gain and the loss would net page 2, Part III under beneficiaries, and carry to Line 4 of the 1041.  The net loss would then be split 3 ways and reported on each beneficiary's 1041 K1 statement on line 3 or 4a, depending on the nature of the loss, if it is long term or short term.

[pattypuzzled]

Hi,

In the end the K-1 only has an amount in 11 on the K-1 and listed as "D".  This is the final 1041 return.

[M-MTax]

That's where it belongs on a final return for a LT cap loss.

[SamS1]

@pattypuzzled Yes, that would be correct.  If the long term loss carryover was greater than the gain from the sale of the property, then the only thing distributed out on the final K1 would be any remaining carryover losses.  This is indicated on the Final K1 on line 11 and the D is the code for the loss characterization. 

[pattypuzzled]

I am the only beneficiary who lives in Illinois where the trust was created.  Where would I add the LTCL on the K-1-T for Illinois?  Would it be considered a "subtraction from Federal income" on the IL return?  There is only a loss showing on the final 1041 since the Trust absorbed the gain from the property sale in 2020.

[SamS1]

You probably do not need to complete the K-1-T as it is not attached to the IL-1041 per the instructions.  Do not attach any Schedule K-1-T that you complete and issue to your beneficiaries or any Schedule K-1-T(3) you complete to your Form IL-1041.  Since you are distributing out loss instead of income, then no K-1-Ts would need to be completed.  The non-resident beneficiaries would not have a filing requirement due to the loss being the only item distributed from the trust.  You only need to file the IL 1041.  For Illinois Income Tax purposes, you must give a completed Schedule K-1-T and a copy of the Schedule K-1-T(2), Beneficiary’s Instructions, to each beneficiary if any part of your income is paid, credited, distributed, or deemed to have been paid, credited, or distributed by you to that beneficiary.