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HomelandH
New Member

Rental Property and Grantor Trust

My father owns a residential rental property and this last year we placed into a living trust "Grantor Trust" Since I oversee and manage the property we have always split the profit and losses 50/50.  This year I have been informed that an IRS form 1041 should be filed and we use our SSN rather than an EIN, but how should the form be filled out so that both me and my father are 50/50 as the operating statement reflects?  Are there any other considerations that I should be aware of? 

5 Replies
Carl
Level 15

Rental Property and Grantor Trust

@Hal_Al  @VolvoGirl please add your knowledge to this. While my knowledge on estates is "okay", it's a bit less on trusts. I'm only contributing what I know (or think I know) because of my experience with rental property.

For starters, if your state taxes personal income, you can stop reading at this point and seek professional help. things can, and commonly do get more complicated with trusts and the such when the state whose laws apply to the trust, also taxes personal income.

Now for some clarification:
My father owns a residential rental property and this last year we placed into a living trust "Grantor Trust"

No. "we" did not place it into a trust. Your father who is the sole owner of the property placed it into a trust.

Since I oversee and manage the property

That doesn't mean you have any ownership in the property. I merely means that you manage the trust and it's assets to the extent that the property owner (your father) allows you to as defined and clarified in the trust.

 

we have always split the profit and losses 50/50.

For you, that is not rental income. It's compensation you are paid either by your father, or from the trust for services you provide as the trust administrator. So that income you receive is not passive rental income. It's non-passive (earned) income paid to you for the services you provide. Therefor it would be reported to you on either a W-2 as an employee, but more likely on a 1099-MISC in box 7 as the administrator of the trust.

 

This year I have been informed that an IRS form 1041 should be filed and we use our SSN rather than an EIN,

A trust is treated as it's own entity "for tax purposes". Therefore the trust requires it's own EIN.

 

but how should the form be filled out so that both me and my father are 50/50 as the operating statement reflects?

The question is rather generic to me. You follow the prompts in the program and it guides you. If you get stuck on a screen, then the information you seek in order to continue would be asked with a more specific question.

Are there any other considerations that I should be aware of?

Quite a few I can think of. Probably more I"m not aware of.

For starters, has possession of the property been transferred to the trust by updating the property deed? I question this, because if there's a mortgage on the property you probably need the permission of the mortgage holder to do that, since they are listed as a lien holder on the property. I do  know you need their permission when changing, adding, or removing ownership of a person or business on the deed. I'm not so sure for a trust through, but would expect that if lender permission is required, that lender notification is.

 

To often I see where folks establish a trust for real estate property. Yet they never do the paperwork and legwork at actually transfer the property into the trust. Then when the owner/grantor of the trust dies everyone is shocked to find out that the trust doesn't possess anything, and therefore has nothing to distribute to any heirs. An even worse scenario occurs if a tenant of the property sues the owner, and the owner discovers the hard (and expensive) way that the trust has no ownership or control of the property.

 

If this property was placed in a trust through the proper channels prior to 2019 and no EIN was obtained for the trust, then the property is owned/controlled by an entity that does not yet legally exist. At least not on paper from a tax stand point.

A trust is required to file IRS Form 1041 every year with exceptions for those years where there is less than $600 of reportable income. (reportable income is not the same as taxable income.) I'm confident the trust has met that filing requirement "if" the trust actually has control/ownership of the property on the legal front.

 

The more I think and type here, the scarier this gets. So I'm gonna stop and wait for the others to chime in. Please wait for at least one of them to do so before responding. It's perfectly possible that some of my information could be incomplete, misleading, or just flat out wrong. As I stated above, while I generally know my stuff about rental property, I'm not exactly the sharpest pencil in the can when it comes to trusts.

 

tagteam
Level 15

Rental Property and Grantor Trust

@HomelandH You might want to seek an in-person consultation with a tax professional for this scenario (particularly a tax professional who has some experience with trusts and estates).

 

The typical grantor trust is considered a disregarded entity for federal income tax purposes and has several options with respect to filing an income tax return. Primarily, the trustee of the trust may use one of the optional filing methods delineated in the link below thereby avoiding having to file Form 1041 (i.e., the income, deductions, gain, et al, can be reported directly on the grantor's individual income tax return).

 

See https://www.irs.gov/instructions/i1041#idm140366310222736

 

Therefore, if your father is the sole owner of the rental property and placed the property in a revocable (living) trust naming himself as trustee and beneficiary, then nothing much has changed with respect to how you reported in previous years. However, if the foregoing is not the case, then you need to provide more details regarding exactly how the transfer was structured and the specific language in the trust as it relates to the rental property.

 

Your reference to an "operating statement" also requires more details as it might pertain to any agreement between you and your father as to how profits and losses are to be shared. Typically, operating agreements are drafted when the parties thereto intend to form a partnership and that would complicate matters somewhat in this instance. 

Anonymous
Not applicable

Rental Property and Grantor Trust

grantor trusts are not required to file a tax return unless the property is under an EIN for example a brokerage a/c is held in a grantor trust, It chooses not to get an EIN but uses the owner's SSN. no trust return is filed.

 

tagteam
Level 15

Rental Property and Grantor Trust



Certain grantor trusts can still select an optional method of filing (i.e., not file 1041s) even if the trustees obtain TINs for the trusts.

HomelandH
New Member

Rental Property and Grantor Trust

Thank you all for responding to my question and I will give more clarification to the how and why. 

 

We are in a state that has NO income tax.

 

The Trust has been properly filed with the entities and the DEED is in the name of the trust. (there is NO mortgage)

 

Operating statement is from Quicken and represents the gains and losses for the year.

 

There were over $600 in income for the year.

 

I signed into TurboTax to do my taxes and elected the LIVE "we will do your taxes for you" and I was advised that because we placed the house into a trust this year, I was required to file an IRS 1041 on my own before I could proceed any further.  Once I bought the program and proceeded into it, the questions began to arise without anywhere to field them.  Hence, why I am here. 

 

My trust attorney advised me to not file for an EIN, because the trust is a "Grantor Trust" and requires no EIN.  Upon looking into this, it is widely advised to NOT file for an EIN and use TIN as it will fit in the form the same.  

 

BIG QUESTION 

This is the reason why I have leaned on you.  

Hopes that I can get clarification and HELP OTHERS OUT. 

How can I convince the TurboTax CPA that I Do Not need an IRS 1041?

If I do need one, the how do I fill the darn form out correctly? 

 

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