Sale of home held by irrevocable trust

[GroverLLC]

A number of years ago (5), a relative needed to move from her home into assisted living.  An irrevocable trust was established at that time to potentially shield some of her assets.  (I am the trustee.) The condo that she owned and had been her primary residence was moved into the irrevocable trust at that time.  She passed away 2 years ago and the condo was sold in 2024. 

During the time between the trust assuming ownership of the condo and the date of the condo sale, no one was living in it on an extended basis. However since I live in another state, I would stay there for several weeks at a time several times per year when I would visit.  Just prior to the sale, a water pipe burst in the condo above which caused significant damage the our kitchen.  Rather than spend the time and money to repair the damage, we sold the condo "as is" which resulted in a significant loss.  (Insurance covered only a small portion.)

Turbo Tax Business passes the loss through to the beneficiaries on their K-1's, but is that allowed by the IRS?  It appears that the courts agree that it is a loss to the trust, but the IRS perhaps does not.

How should this ultimately be handled?

[DianeW777]

Yes, the loss would be passed through the K1 to the beneficiaries. 

• Where do I enter a Schedule K-1 that I received?

As long as no one used the property for personal purposes as a home or second home and none of the beneficiaries had their name on the deed before death, the loss is allowed on their personal returns.

[GroverLLC]

Thanks for the reply.

No one used the condo as a home during the 4 years that it was owned by the trust.  None of the beneficiaries had their name on the deed - only the trust.

However, as I lived in a different state, I made approx 20 trips to visit my relative during those 4 years and stayed in the condo for a total of about 8 months - usually 10-14 days at a time. (It was vacant the rest of the time.) None of those visits were for vacation use.  All were to visit my relative, her care team and attorneys, and take care of her business affairs located there and to wrap up her estate after she passed.  (The alternative would have been to stay in hotels which would have conservatively cost the estate in excess of $25,000 over that time period.)

But would the IRS try to make an argument that my stays in the condo amounted to personal use and thus disallow the loss?

Thanks.

[DianeW777 · Accepted solution]

No, not if you have proof of appointments, checking on your relative's status and needs, and taking care of business, etc. You did not own it or use it as your second home. You have proof of your own residence, mailing address and domicile which would also show proof this was not a personal use asset for you.