Rental Property Depreciation during 2 Month Ownership by Trust?

[DC]

My mother passed away in February.  She had a rental that passed to her trust.  The trust held the rental for two months, until title was changed to the beneficiary.  Can/should the trust claim depreciation?  The adjusted basis on date of death would be over $1Million.  Only two months rent was collected, so the loss would be huge.  Would the beneficiary benefit from a loss carryover on her tax return?  I am filing a short and final return.  I am the trustee and beneficiary.

[tagteam]

I am sorry for your loss.

You should seek guidance from a legal/tax professional since the figures here are large.

Note that the trust would typically take the property with a stepped up basis and prior accumulated depreciation (prior to your mother's passing) would essentially disappear. Depreciation would start over with the new, stepped-up basis. 

Whether or not the trust actually receives the stepped up basis is dependent upon the type of trust and how the property was held prior to her passing.

Regardless, if the trust files a final return, the income (rent) and depreciation for that two-month period could be passed through to the beneficiary on the K-1.

[DC]

Thank you.  It's not a complicated trust document.  The house was in my mother's name, transferred to her personal trust and states it is inherited by me.  It's a large FMV amount, but the current depreciation is only a few thousand dollars, as it's for two months on the building value only.  I've done a "practice return" and the flow through to my K-1 is around $3K, which is fine.

When doing the practice, TT is asking if the property was disposed of.  Of course, it was.  If I enter the date it was transferred to me,  it is asking for the amount of the sale price.  There is no place to answer that the property was distributed without a sale.  Do I enter "zero" for sale price?  If I do, it generates a loss of over a million dollars.  That tracks to my K-1, but perhaps that line is just administrative and doesn't get entered on my return.  Do I enter the FMV at the time of transfer even though no money was exchanged? I guess that would calculate a depreciation recapture.   I hope my question is clear... Thanks

[tagteam]

Does the trust have an EIN? Was a 1041 filed for the trust? How did you get a K-1, if not?

Note that the trust might actually be considered to be a grantor trust if you are the sole trustee and beneficiary, in which case the trust, itself, would be treated as disregarded for federal income tax purposes.

[DC]

I'm working on the 1041 now, checking forms as I go, including the K-1 tracking.  The trust has two 1099-S forms for property sold by the trust In addition there is a small amount of rental income .  How could the filing requirement be disregarded in that case?  Yes there is an EIN.  My inherited property isn't the only transaction.

Thanks

[tagteam]

I was referring to a possible scenario where you are considered to be the owner of the assets in the trust (a grantor trust). That would require something on the order of you being the sole trustee and sole beneficiary (and, possibly, no successors). 

Otherwise, you would prepare and file the 1041 with the associated K-1(s). Are the any other beneficiaries? 

[tagteam]

Additionally, if this is the typical revocable living trust (RLT) situation, then the trust was a grantor trust during your mother's lifetime and became irrevocable upon her passing.

The trust would take the any real property she owned with a stepped up basis and prior depreciation deductions would essentially disappear.

[DC]

Thank you.

The trust became irrevocable on Feb 15 and will be closed this year.

I am filing a 1041 short and final return. 

The trust itself sold two properties, both reported on 1099-S.  After selling expenses, there is a small loss that will track to my K-1.

There is a third property for which I am declaring trust income for two months rental income and I am depreciating  for the two month period at the new FMV.  The net rental loss will be distributed to my K-1 from Schedule E.

This 3rd property was not sold; rather title was changed to me on April 15, as the beneficiary.  My main question is how to handle the disposition of assets section.  The cost basis is the FMV on April 15.  TT is asking what the sale proceeds amount is.  Since the property was not sold, there is no money to report.  What do I enter in that field? 

Can I disregard the entries for the rental property altogether and simply report the two month renal income and depreciation on my mother's final return, along with the one month that she actually received while living? With the inheritance itself not being taxable, that seems an easy fix, but maybe not appropriate?  

To answer your beneficiary questions, her trust also named my sister as a beneficiary, however she passed away a year before my mother.

Thanks for your help

[tagteam]

If you are simply distributing the asset (property) to you (and/or another beneficiary), then there is no need to report that distribution; it is not a taxable event. 

The beneficiary(ies) will take the trust's basis in the property.

[DC]

 I am completing a Schedule E for the two months of rental income and expense, during the period following my mother's death until the time the property was transferred to me, as beneficiary.  I am also depreciating the building for the two month period.  The new FMV is basis and the date acquired is her death date .  To calculate the two months correctly, I must enter a disposal date (otherwise it calculates a full year.)  Thus, TT is asking for the sales price.  If I state Zero, a huge capital loss tracks to my K-1, Line 11, Code E.  Should I state the sale price to be the FMV, less the two month depreciation? 

The last advice given was to not report the property at all, as it is a non-taxable inheritance; however, I need to account for the property during that two month ownership by the trust?  Please advise.  Thanks

[tagteam]

If you must enter the income and expenses on the 1041, then you will have to enter the sales price as the FMV less the two months of depreciation unless you do an override.

Note that, although an override will work (I tested that scenario), you will most likely not be able to e-file; you will have to print and mail the return (the TurboTax accuracy guarantee will also be void, for whatever that might be worth to you).

[tagteam]

@DC 

Note that you can allocate the two months of depreciation to the beneficiaries (which I believe is your intent) on the Depreciation Smart Worksheet (see screenshot) without doing an override.

[DC]

Yes, that is my goal.  I'm not clear on the "disposition of the asset (building."  I think my problem begins when answering the step by step question asking if I disposed of an asset.

  If I answer "none of the above", the Smart Worksheet is ok.  But it does generate a Form 4797  showing a huge $1M+ loss on the "Current Year Dispositions Smart Worksheet." because of the gross sale being zero.  Maybe that doesn't matter (?) if this is the final year of trust accounting.  It would just be disregarded. ?? 

  If I answer that the property was "sold or otherwise disposed of," then I get the tracking of the $1M + loss to my K-1.  I certainly cannot inherit property and the loss as well. Yet, the property was truly disposed of when given to me.   I just would like the $3K depreciation for the 2 months and nothing more.  I'd like input on what specifically do. and/or if I should answer No to selling or disposing of asset.

[tagteam]

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@DC wrote:

I just would like the $3K depreciation for the 2 months and nothing more.  I'd like input on what specifically do. and/or if I should answer No to selling or disposing of asset.

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Since you know the exact amount of depreciation for the period, I would suggest simply entering that figure on the Worksheet in the screenshot.

Do not enter any disposition for the property whatsoever. If you do not enter a disposition, the program will not generate any disposition form, such as a Form 4797.