Can I take expenses associated with holding property in trust (property tax, insurance, utilities, condominium charges) as a deduction in the trust return.

[johnymac24]

My mother passed in March.  Her residence was left in a living trust and I am the successor trustee.  We sold the property in November.  So my question centers on whether we can deduct our expenses associated with carrying the property during the period between her death and sale of the property.  The property was never rented, or occupied, during this period

[MichaelL1 · Accepted solution]

Yes, the costs incurred by the Trust to take care of the property and get it ready for sale are deductible expenses for the trust.  They are protecting the trust assets until they could be sold.

In your case, the property was sold in a very short period of time. 

The IRS’ criteria for a fully deductible expense is any expense that is both incurred in connection with the administration of the estate or trust and incurred due to the property being held in such estate or trust.

[johnymac24]

Since the trust has no Income and the expenses in questions are about $ 5K (and I think subject to 2% hurdle).....I am thinking I might be able to take the 266 section election to greater advantage by capitalizing these expenses instead - and using them to increase my LT Capital loss on the sale of the residence.  I think this might be OK for the property taxes, home insurance, utilities - although perhaps capitalizing the condo association  common charges might be a bit of a reach.  Would welcome your thoughts on this.  Again thanks so much for your assistance!

[GLB]

Where are these costs entered into the trust tax return? 

[Anonymous_]

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@GLB wrote:

Where are these costs entered into the trust tax return? 

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The costs, if an election is made to capitalize, are not entered into the trust income tax return (Form 1041).

Rather, an election is made by attaching a statement to the return and, thus, any such costs are added to the basis of the property. 

See https://www.law.cornell.edu/cfr/text/26/1.266-1

[wlee1120]

@Anonymous_  wrote

The costs, if an election is made to capitalize....

If I don't decide to capitalize, would these costs to maintain the property still be deductible?  If so, where would I enter them in the trust tax return (1041)?

[Anonymous_]

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@wlee1120 wrote:

If I don't decide to capitalize, would these costs to maintain the property still be deductible?  If so, where would I enter them in the trust tax return (1041)?

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Property taxes would be deductible on Line 11 of Form 1041 (Taxes in TurboTax Business) while mortgage interest would be deductible on Line 10 (Other interest expense in TurboTax Business).

As far as the other costs, you need to look at allowable deductions under Section 67(e) - good luck with that because there are arguments all over the place for whether or not those miscellaneous expenses are deductible by a trust. However, the widely accepted position is the expenses are deductible to the extent they would not have been incurred if the property were not held in a trust.