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Level 1

Estate's 1041: The estate sold inherited real estate (primary home) for a loss. Do beneficiary's K-1s reflect the distribution of the sale proceeds?

Background: 

- Using TurboTax Business 2018 for the estate's 1041. 

- The estate sold the inherited primary home real estate for a loss.. i.e. there is no income for the estate to report on the sale.

Question:

- Would the K-1s for each beneficiary need to reflect the distribution of the cash proceeds from the sale of the inherited real estate? 

Assumptions:

- The purpose of the K-1s is to record income that the beneficiaries should include on their tax filings. The purpose is not to record all money transfers from the estate's bank account to the beneficiaries.

- The beneficiaries also do not owe income tax on the estate's sale of the inherited property which resulted in a loss

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Accepted Solutions
Level 14

Estate's 1041: The estate sold inherited real estate (primary home) for a loss. Do beneficiary's K-1s reflect the distribution of the sale proceeds?

Assuming that the Form 1041 for the ESTATE is the FINAL Form 1041 and assets of the Estate have been distributed in the timeframe of the Form 1041:

The generated K-1s from the Form 1041 will in fact report any income of the Estate on which the Estate optionally chose not to pay tax but instead distributed pre-tax to the beneficiaries. The same would be true relative to capital loss.

Therefore, here are some illustrations to demonstrate what happens and how it is reported:

  1. Any expense paid by the Estate but allowable deduction passed to the beneficiaries (such as Executor Fees) - assuming that the beneficiary under TCAJ can deduct!
    Also showing how interest income and non-qualified dividend income can be reduced if the allowable expense is partly used to be accounted against that income.  
    Then, excess allowable deduction passes through on K-1 Line 11A
  2. Sale of decedent's home where no $250,000/$500,000 exclusion is allowable but as investment property, any capital loss is allowable and any loss or any capital gain is passed through to the beneficiaries on K-1 Line 11C.  Alternatively, see the 3rd attachment [page 8, Schedule B of Form 1041, lines 4 & 5] which is an alternative method to report and pass through any capital gains.
  3. Last attachment:Form 1041 Allocations to Beneficiary K-1  Note especially, that the corpus or principal of the Estate, which itself is post-tax, presuming that any residual income in the corpus previously had taxes paid against it on recognition of that income, is passed to the beneficiaries. See page 8 of Form 1041 Schedule B line 9 and line 10, where Line 9 is the reportable Ordinary Income that will show on the K-1 in the respective lines (5, or 6, as an example) but line 10 is the distributed principal but does not appear on the K-1 since it is not reportable income (or loss).

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5 Replies
Level 14

Estate's 1041: The estate sold inherited real estate (primary home) for a loss. Do beneficiary's K-1s reflect the distribution of the sale proceeds?

Assuming that the Form 1041 for the ESTATE is the FINAL Form 1041 and assets of the Estate have been distributed in the timeframe of the Form 1041:

The generated K-1s from the Form 1041 will in fact report any income of the Estate on which the Estate optionally chose not to pay tax but instead distributed pre-tax to the beneficiaries. The same would be true relative to capital loss.

Therefore, here are some illustrations to demonstrate what happens and how it is reported:

  1. Any expense paid by the Estate but allowable deduction passed to the beneficiaries (such as Executor Fees) - assuming that the beneficiary under TCAJ can deduct!
    Also showing how interest income and non-qualified dividend income can be reduced if the allowable expense is partly used to be accounted against that income.  
    Then, excess allowable deduction passes through on K-1 Line 11A
  2. Sale of decedent's home where no $250,000/$500,000 exclusion is allowable but as investment property, any capital loss is allowable and any loss or any capital gain is passed through to the beneficiaries on K-1 Line 11C.  Alternatively, see the 3rd attachment [page 8, Schedule B of Form 1041, lines 4 & 5] which is an alternative method to report and pass through any capital gains.
  3. Last attachment:Form 1041 Allocations to Beneficiary K-1  Note especially, that the corpus or principal of the Estate, which itself is post-tax, presuming that any residual income in the corpus previously had taxes paid against it on recognition of that income, is passed to the beneficiaries. See page 8 of Form 1041 Schedule B line 9 and line 10, where Line 9 is the reportable Ordinary Income that will show on the K-1 in the respective lines (5, or 6, as an example) but line 10 is the distributed principal but does not appear on the K-1 since it is not reportable income (or loss).

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Level 1

Estate's 1041: The estate sold inherited real estate (primary home) for a loss. Do beneficiary's K-1s reflect the distribution of the sale proceeds?

Thanks so much for your help. When clicking on the 1st & 3rd attachment, the  result is an access denied issue... i.e. the browser returns XML w/ "<Error><Code>AccessDenied</Code>...". The 2nd attachment opened correctly.
Level 14

Estate's 1041: The estate sold inherited real estate (primary home) for a loss. Do beneficiary's K-1s reflect the distribution of the sale proceeds?

Change your browser or else clear cache - it is a problem local to your computer.
I used a totally different browser [Firefox] from the one I am using here [Chrome] and signed in with another of my ids - and had no problem whatsoever in accessing the three pdfs - note that the other id used in Firefox is a plain vanilla id - the same as any other taxpayer.
Level 1

Estate's 1041: The estate sold inherited real estate (primary home) for a loss. Do beneficiary's K-1s reflect the distribution of the sale proceeds?

Thanks again for you help. I did not do anything different on my end, but I can access all of the attachments with Chrome now. Fantastic job answering with the attachments.
Level 14

Estate's 1041: The estate sold inherited real estate (primary home) for a loss. Do beneficiary's K-1s reflect the distribution of the sale proceeds?

you are most welcome