topic Re: Schedule K-1 in Get your taxes done using TurboTax

Schedule K-1

taxdean — Wed, 06 Apr 2022 05:16:27 GMT

So, my parents passed away last year and had twin (revocable) trusts, each with only half their home in it (and nothing else). The home was valued upon death by a broker at a value that was substantially more than it sold for about 3 months after their deaths. After realtor commissions, the net sales price was a lot less, say 50k. There were also a lot of other expenses in liquidating the estate which, I was told, can be assigned to the trust if I want, but I digress. The cash from the sale was placed in a trust bank account that earned no interest before being paid out to 5 beneficiaries. One of the five beneficiaries told me their accountant was asking if the trust would be supplying a Schedule K-1 and it made me think - oops, I guess I was supposed to handle that! A NOLO press executor book says that all beneficiaries who get distributions should get a K-1. Elsewhere, I read that the schedule K-1 is only necessary if some of that distribution is income. Does anyone here know which is true?

Someone else suggested that, even if the answer above is that no K-1 is needed due to no income, if the trust had a loss, which it did, that we might still want the Schedule K-1s issued so that the tax loss could be shared by beneficiaries. I wonder how much sense that makes given that the home sold within three months of death, for a value that is probably a more reliable indicator of value at death than some pre-sales-commission estimate done by a broker. One of the beneficiaries cannot use a tax loss and does not want any trouble with the IRS! Thanks so much for any help.

Re: Schedule K-1

DianeW777 — Wed, 06 Apr 2022 13:57:28 GMT

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)

Re: Schedule K-1

richardkutta4 — Wed, 06 Apr 2022 14:06:34 GMT

Response from is on target. When I had same estate administrator responsibility, I found TurboTax Home & Business very helpful in preparing trust returns and producing K-1s.

Re: Schedule K-1

taxdean — Wed, 06 Apr 2022 17:02:27 GMT

THANK YOU SO MUCH! So, you are saying that Nolo was right, that K-1s are needed for any distribution over $600, even if it ends up equating to no income; that, indeed, that is what the K-1 is intended to do, i.e. to resolve if the distributions were partially income or loss? Do I also need to do a 1041, whatever that is that I keep reading about?

Are you saying that the loss amount is unlimited, but that you can only take 3,000 of it per year and carry the rest forward? I assume that is 3,000 per beneficiary per year, right?

If there are 5 beneficiaries, is the loss shared proportionally according to how much each got as a distribution? Or can it be assigned, if all agree, to the folks with the highest potential to be able to use it? Some of the beneficiaries are in a very low tax bracket, maybe even a zero tax bracket.

Please verify that this does not change your answer, which is my suspicion: The home did not sell for $50,000. To be clear, it sold for about 630k and, after sales commissions and other charges, the trust got 602K. The broker valuation was 665k. So, is the initial loss 665 - 602 = 63, or is it 665 - 630 = 35? I would be surprised if the 665k estimate was net of any sales commissions, so should it be reduced before computing that initial loss? Then, I can also add the estate expenses, is that correct? Someone said I can choose to assign ALL of the estate's expenses to the trust (presumably because the estate would have no other place to deduct such other non-home-sale-related expenses), even though some of it was not for the asset in the trust. Is that correct?

Having your help is a godsend. I used to be able to get great advice over the phone with TurboTax from EAs and CPAs mostly, but, this year, I cannot seem to get any of my issues escalated to that level and have little confidence in the answers after they spend an hour searching their database and mention any host of things along the way that I know to be irrelevant. Do you have any suggestion of how to have a phone conversation with someone like that at TurboTax if i feel I need that kind of help too?

Re: Schedule K-1

taxdean — Wed, 06 Apr 2022 18:47:10 GMT

Hi Richard. I assume you meant that the response from Diane is on target. Regarding the forms, I am a bit confused. I have turbotax for home and business for my own personal use. However, my question posted was about an estate that I am an executor for, including two trusts., one for my dad and one for my mom, who both passed away in 2021. I assume that I would need to buy a new copy to use for that to generate the forms you mention. Is that correct? If that is the case, other than worrying about being too late, it may be better for me to assign those forms to the CPA that is doing my parent's final tax return. Kindly address. Thanks much for your participation. Dean

Re: Schedule K-1

taxdean — Wed, 06 Apr 2022 19:05:19 GMT

A couple of other related questions:

Do Schedule K-1s get filed with just the IRS or also with state tax authorities? If the latter, I assume that it is NOT the state (Florida) where the trust was that matters but, rather, the state where the beneficiaries reside that matters (California and one other). Is that correct?

My mother who had her own trust, passed away in January of 2021. I think that means the due date for Schedule K-1s is March 15, 2022, given what i read about the 15th of the 3rd month. If that is the case, then I am/will be late. Is it too late to change the tax year of the trust to end one year after her passing, so that the due date then becomes April 15th and so i can possibly get it done in time?

Thanks again!

Re: Schedule K-1

DianeW777 — Wed, 06 Apr 2022 19:31:03 GMT

It is the state where the trust resides when preparing the estate return. For beneficiary state returns you will use the federal K-1 if no state K-1 is provided with the estate.

Yes, the due date is April 18th for this year due to the holiday. As long as you file the estate tax return before that date it will be filed on time. The beneficiary returns will be due on that same day so if they get K1s they may want to have them before that date, or they can file an extension, or they can amend if they file their personal returns before they receive the K1.

Previous questions:

I assume that is 3,000 per beneficiary per year, right? - Yes, it is per beneficiary.

Is the loss shared proportionally according to how much each got as a distribution? It is shared based on their percentage of inheritance.

The broker valuation was 665k. So, is the initial loss 665 - 602 = 63? - Yes your formula is correct.

I assume that I would need to buy a new copy to use for that to generate the forms you mention. Is that correct? Yes, you need to use TurboTax Business.

What types of returns does TurboTax Business handle?

Re: Schedule K-1

taxdean — Thu, 07 Apr 2022 20:47:45 GMT

Sorry to be so **bleep**, but I need more clarification on a couple of the answers, please. Although I am more worried about the other beneficiaries than about myself as a beneficiary, I am most worried about doing my job correctly as the trustee (and executor) and not being subject to a lawsuit. Regarding the state issue for K-1, I am responsible for providing those forms, rather than being the one receiving them (although, as a beneficiary, I will also be receiving whatever I provide as trustee, but let's table that). As executor, are you saying that the trust's only responsibility is to provide a K-1 for the state where the estate was, which is Florida? If so, since Florida has no income tax, doesn't that, then, mean no state K-1 is necessary? Are you then also saying that the estate has no obligation to produce K-1s for any other states? In other words, the beneficiaries will have to use the Federal K-1 for their states and that will be sufficient for them?

Regarding the deadline, I keep reading about the 15th of the month that is three months after the tax return year ends and, if the latter is December 31st, then that would be March 15th, not your April 15th. I am guessing that the March 15th date is there to provide beneficiaries a minimum of a month to integrate the K-1s into their personal tax returns. So, am I late already if the trust has not sent K-1s to the IRS and beneficiaries? if so, will I or the estate be assessed a penalty? Please clarify. Is it too late to change the tax year to end a year from the first death which would, coincidentally, move the first trust's date to April, and the other trust's to July? If you delay that tax year, how could you account for the months in between?

I know you have already clarified this but everywhere I read, including TurboTax's information "What is a Schedule K-1 Form 1041: Estates and Trusts?", about the need for K-1s, it talks about income, e.g., $600 max, not distributions as one criterion for whether a K-1 is needed. Setting aside, for the moment, that there may actually be a loss, AFAIK, the trust made no income, and all it did was sell its one asset (parents home, sold for less than the value assigned as of date of death) and distribute it to the beneficiaries. If no one cared about a tax loss, are you sure K-1 still needs to be filed?

Are you also saying that, if the property sold for its valuation at death, that the sales commission, if that were the only expense, would constitute a loss, indeed the entire loss? Specifically, are you saying that the broker valuation should not deduct (expected) sales commissions?

Actually, are you also saying that we can deduct all costs of settling the estate, even those not associated with the trust's single asset, the home? FWIW, in case it would matter, any other assets have sold at prices below their valuation at death, such as collectibles and, indeed, some of those valuations costs some money to get done, so they would seem to be an expense of the estate but not for the home.

When you talk about allocating any (income or) loss by percentage, if certain beneficiaries got fixed dollar distributions, I assume you mean to simply compute the effective percentage they got compared to the distributions to all beneficiaries, and use that, right?

Thanks again so very much. Please answer each and every question I've asked. Sorry to be so confused. This is the first and, I expect, last time I will be a trustee/executor.

Re: Schedule K-1

RobertB4444 — Thu, 07 Apr 2022 23:21:31 GMT

Ok. In order-

You have no state filing requirement. You will file a federal 1041 and use the address of the state where the trust was established. That is what @DianeW777 was referencing.

As @DianeW777 told you, the estate and trust filing deadline is April 15th. Here is the IRS page on that.

It is too late to change the tax year. The property was sold in 2021. You have to do the return for 2021.

The income that you received was $630,000 which is considerably more than the $600 thresh hold. You and I know it is a loss. The IRS does not know. The tax return is how you tell them.

You can deduct any reasonable expenses in determining what is a loss. You are the executor. It is your job to determine what is a reasonable expense within the IRS guidelines.

That is the way that you will calculate the percentage allocated to each beneficiary.

Re: Schedule K-1

taxdean — Fri, 08 Apr 2022 01:40:55 GMT

Very helpful. I think the March 15th is for K-1s for pass through entities only. Does that sound right? Is there a better link for reasonable expenses specifically. That just brings up a huge document. Presumably, even clearing out all the house contents and valuing them are reasonable costs if the trust's only asset was the condo and it was soon thereafter sold, right? We paid for airfares and meals for those who helped do it.

Regarding: The income that you received was $630,000 which is considerably more than the $600 thresh hold. You and I know it is a loss. The IRS does not know. The tax return is how you tell them.

I think I get the theme even if the details seem backwards. The house sold for net proceeds of 602k after being valued at 665k, but the latter was not net of realtor commissions. Is the loss the full 63k (in addition to other estate settlement expenses addressed above) or should both have some realtor commisions? And you continue to use the word income, but isn't the 602 just a distribution, and not income. Indeed, it is a loss which seems to be the opposite of income.

Sorry for the "bleep" in my last post. I was using a word that is the first 4 letters of my job, which is as an analyst. Thanks much. Hopefully this will be my last question although I seem to be getting automated kudos for asking more and more questions, rather than slaps on the wrists! Dean

Re: Schedule K-1

Anonymous_ — Fri, 08 Apr 2022 03:16:28 GMT

The March 15th deadline (or three months after the close of the tax year) is applicable to S corporation (1120-S) and partnership (1065) returns. C corporations and estates and trusts that adopt a calendar year have to file by April 15th (or the fourth month following the close of the tax year).

Re: Schedule K-1

Anonymous_ — Fri, 08 Apr 2022 03:20:19 GMT

@taxdean wrote:
The house sold for net proceeds of 602k after being valued at 665k, but the latter was not net of realtor commissions. Is the loss the full 63k (in addition to other estate settlement expenses addressed above) or should both have some realtor commisions?

The loss is the difference between the basis (the fair market value on the date of death) and the sales price (less selling expenses). Since the latter figure is less than the basis, the trust has a loss that can be passed through to the beneficiaries when the trust files its final return.

Note that you really should secure a date of death appraisal by a certified appraiser. The IRS is not obligated to accept anything less than that to show the fair market value of property as of a certain date.

Re: Schedule K-1

Anonymous_ — Fri, 08 Apr 2022 03:30:36 GMT

@taxdean wrote:

Is there a better link for reasonable expenses specifically.

No, and you really have to watch it with respect to certain expenses of estates and trusts.

Generally, an estate or trust can deduct any and all expenses incurred for the management, conservation, or maintenance of estate or trust property, along with the standard taxes, interest, fiduciary/attorney/accountant fees.

However, other costs, that would be "commonly or customarily would be incurred by a hypothetical individual holding the same property" cannot be deducted as miscellaneous expenses.

See https://www.thetaxadviser.com/issues/2014/aug/cantrell-aug14.html

Your expenses (airfare, travel, meals, cleaning, et al) are typically incurred by property owners; they would fall within the category of "ownership costs" and, as a result, would not be deductible since they are commonly incurred by individuals.

The Regulation can be found at the link below:

https://www.law.cornell.edu/cfr/text/26/1.67-4

Re: Schedule K-1

taxdean — Fri, 08 Apr 2022 04:33:43 GMT

So, I now need to ask the question another way. Are you implying that fair market value is not supposed to consider selling costs such as realtor commission, etc? I suspect that is so, but I want to be sure. Given how high commissions are, that would make a big difference in how much the loss is. To restate, if the sales price were the fair market value, does that mean there is a loss equal to the selling expenses (all else equal)? Or is the appraiser supposed to subtract what he thinks are market sales commissions?

Thanks for the advice on the appraisal. The problem is that it has already been sold so s/he wouldn't be able to see the inside of the unit now and my father passed away last at 98 and had become a pack rat with a nasty little dog who was allowed to do its business anywhere it liked and the place had bugs everywhere. I'll stop out of respect for my dearly departed parents, but four children/spouses spent the better part of three weeks getting it in decent enough shape to let a realtor even see it (and it took the realtor a few more weeks cleaning it up before putting it on the market as well). Yes, we did spend a bit of that three weeks looking for hidden valuables as they were prone to hide things in later years, but most of our time was just getting it presentable, not to mention getting new A/C, making repairs, etc.

Frankly, if a place sells in three months and the trustee told the IRS they thought that was the best estimate of market value upon data of death, would they really question that? I'm sure some appraisers are smart but the market is smarter and three months is not very long.

It was their estate attorney who told me a broker valuation would suffice although that WAS after my mom's passing which was three months earlier than my dad's. I assumed the advice would not change when my dad passed.

Thanks much!

Re: Schedule K-1

taxdean — Fri, 08 Apr 2022 04:45:35 GMT

FWIW, the main reason we all flew to the other coast where the house was was to get it ready for sale, knowing what horrible shape it was in from prior visits, and interview sales agents and meet with the estate attorney, etc, etc. I get that the meals are out definitely. In any event, I will study what you've sent and take your advice to heart. I really thank you for providing it.

Actually, I am, now recalling that, while he may have implied that only certain types of expenses are eligible, he did say that since the trust would be the only estate entity filing a tax return, that all expenses of liquidating their estate could be assigned to the trust, even the costs of things that were not in their trusts. Would you agree with that statement?

Thanks again.

Re: Schedule K-1

Anonymous_ — Fri, 08 Apr 2022 13:50:49 GMT

@taxdean wrote:

Or is the appraiser supposed to subtract what he thinks are market sales commissions?

No. An appraisal does not factor selling expenses into the equation. Selling expenses can vary from next to nothing to a rather large percentage, depending on the transaction and the agreement between the buyer and seller.

Re: Schedule K-1

Anonymous_ — Fri, 08 Apr 2022 13:52:55 GMT

@taxdean wrote:
It was their estate attorney who told me a broker valuation would suffice although that WAS after my mom's passing which was three months earlier than my dad's.

The broker valuation should suffice and, honestly, it will, in all likelihood, never be question.

However, the IRS is not obligated to accept that valuation.

Re: Schedule K-1

Anonymous_ — Fri, 08 Apr 2022 13:58:04 GMT

@taxdean wrote:
.....while he may have implied that only certain types of expenses are eligible, he did say that since the trust would be the only estate entity filing a tax return, that all expenses of liquidating their estate could be assigned to the trust....

Yes, all expenses may be expenses incurred by the trust, but note that the regulation (to which I linked in an earlier post) applies to both estates and non-grantor trusts.

https://www.law.cornell.edu/cfr/text/26/1.67-4

Re: Schedule K-1

taxdean — Fri, 08 Apr 2022 17:14:29 GMT

<< "commonly or customarily would be incurred by a hypothetical individual holding the same property" >>

I am having trouble interpreting even this and even more trouble trying to interpret the Cornell legal document. Regarding the quoted phrase above, is it referring to a scenario where the assets being sold are being sold by the decedent prior to his passing, but not inside a trust or even with no legal estate documents, or is it simply referring to someone else LIVING there, i.e., not selling the condo. Can someone please help me? Perhaps if I provide some examples, your answers will help me to understand the general principle at work here. The majority of the expenses incurred were costs that the decedent would never have spent if he was still alive and living there - indeed, he didn't, but costs that a selling agent would have recommended be spent to (cost-effectively) get top dollar, repairing broken things and making the home presentable to potential buyers. Alternatively, the condo may have sold with a credit for repairs which, I would think, would impact the 1041 return in a similar, although probably more costly, way. In general, rather than paying beneficiaries (and spouses) some hourly rate, they worked for weeks getting the place in selling condition, and accepted reimbursement from the estate for travel, a bit of hotels, and meals. The central AC was found non-working, first repaired, and then replaced. Many simpler repairs were done during that three weeks. Then, there were commissions and also clean up costs paid for NON-TRUST (personal possessions, I guess) non-trust collectibles to prepare them for selling and to sell them, all at a loss compared to the valuations that were also paid for. [As I understand it, those losses due to selling personal possessions are not deductible at all]. Then there were payments for final medical bills and funeral expenses of the deceased; also utilities during the period when the condo was not yet sold. I am guessing that professional fees associated with the estate tax returns and attorneys fees are deductible. Thank you!

Re: Schedule K-1

Anonymous_ — Fri, 08 Apr 2022 17:23:03 GMT

@taxdean wrote:

Then there were payments for final medical bills and funeral expenses of the deceased; also utilities during the period when the condo was not yet sold. I am guessing that professional fees associated with the estate tax returns and attorneys fees are deductible.

Funeral and medical expenses are not deductible on Form 1041.

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

However, expenses for preparation of fiduciary income tax returns, the decedent's final individual income tax returns, and all estate and generation-skipping transfer tax returns are fully deductible (same link).