Income from a Home in a Trust which is Rented Out

[trust812]

Can expenses such as homeowners insurance be deducted? Is income reported at the 37% Trust Tax rate level or is it distributed to the Beneficiaries via a K-1 and the Beneficiary pays a lower tax rate? Can the house be depreciated if it’s being rented out?

[M-MTax · Accepted solution]

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@trust812 wrote:

Can expenses such as homeowners insurance be deducted? 

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Yes, property and casualty insurance premiums paid can be deducted from rental property income.

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@trust812 wrote:

Is income reported at the 37% Trust Tax rate level or is it distributed to the Beneficiaries via a K-1 and the Beneficiary pays a lower tax rate?

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The top trust tax rate would apply if the trust reported and retained the income. Otherwise, if the income were distributed to the beneficiaries, the beneficiaries would pay any income tax due at their marginal tax rate.

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@trust812 wrote: Can the house be depreciated since it’s being rented out?

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Yes.

[Mike9241]

what kind of trust? if a grantor-type trust, there's no question that income and expenses are taxed to the grantor. even a trust labeled as an irrevocable can be a grantor -type trust if the grantor retains significant control.

for a true irrevocable trust such as what results when the grantor dies or ceases to be in control, then it depends on the provisions of the trust. some states give the trustee great discretion. for example, the trust may say the income may be distributed, so the decision is up to the trustee. on the other hand, it may say the income must be distributed. even if there is no provision for income distribution state law may give the trustee discretion as to whether income can be distributed.  

finally depreciation is part of corpus, so the net cash income could be distributed but the depreciation expense remains with the trust. Agian, the trust instrument may allow distribution of depreciation or state law may leave it at the discretion of the trustee.

[M-MTax]

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If you read @trust812's other post, you'd know that their father passed away in September of last year and his house was in a (presumably) grantor trust which is now at issue.

That house is now apparently being rented out (presumably to a third party) and the general rule is that depreciation deductions follow income related to the asset being depreciated. 

[trust812]

Is it true if the income was distributed the expenses such as the homeowners insurance premium would be deducted first on the 1041 or would this be reflected on the K-1?

[trust812]

It’s not being rented out YET. I clarified it in another post. I am sorry for the confusion! 

[trust812]

It’s not a Grantor type. Its Irrevocable.