Deducting house repairs and improvements from a trust

[djimm100]

I am a friend-of-the-family trustee, with no personal interest, of a complex, irrevocable trust. The beneficiary is the daughter of the trustor and lives on a property owned by the trust. Can I:

a) deduct costs of repairs and maintenance from the trust?

b) deduct costs of improvements from the trust? If so, in the current year, depreciated over time, or only when the property is sold?

[Irene2805]

Yes you can deduct the cost of repairs and maintenance from the trust. You would report the property income and expenses on a Schedule E in the 1041 return (just as on a 1040 return).

Improvements are depreciated over time. The IRS requires that depreciation for such improvements occur over the economic life of the building.  Repairs can be taken as an expense and deducted in the year they are incurred.

An improvement is work that prolongs the life of the property, enhances its value or adapts it to a different use. On the other hand, a repair merely keeps property in efficient operating condition.

[tagteam · Accepted solution]

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@djimm100 wrote:

a) deduct costs of repairs and maintenance from the trust?

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This scenario really gets tricky because "ownership costs", which are those costs incurred merely by reason of being the owner of property, are generally not deductible just because the property is placed in a trust. In other words, if a hypothetical individual would have incurred the same costs had the property not been held in a trust, the costs are not deductible by the trust.

See Treas. Reg. §1.67-4(b)(2)

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@djimm100 wrote:

b) deduct costs of improvements from the trust? If so, in the current year, depreciated over time, or only when the property is sold?

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Improvements are not immediately deductible; they are capitalized. However, in this instance, since the property is not actually rented to the beneficiary, the improvements would have to be added to the basis and recovered when the property is sold to an unrelated third party in a fully taxable transaction.

[djimm100]

Can property insurance and property taxes be deducted?

[tagteam]

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@djimm100 wrote:

Can property insurance and property taxes be deducted?

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Property taxes definitely since they are expressly excluded from the Treasury Reg language. Property insurance would most likely be just another ownership cost (unless the insurance cost is incrementally higher than it would be if the property were not being held in a trust).