Form 1041 Sale of Home

[MZVA]

I am preparing form 1041 for my mother's estate.  We sold her home and the proceeds were distributed to the beneficiares.  However, we are reporting a net loss on the sale of the home after stepping up the basis and paying closing costs.  The only other income reported on form 1041 is income and dividends from financial assets.  I have read that capital gains are normally taxed at the estate level and not shown on beneficiaries' form K-1.  During the Turbo Tax interview, when asked if there were any distributions made to beneficiaries, I listed the proceeds from the sale of the home.  Should I not have done that, since there was a loss on the sale?  As a result, Turbo Tax is showing that there is income of about $1000 to be distributed amongst 5 beneficiaries.   This seems silly.   Is it okay to say there was actually no income distributed to the beneficiaries, or would that not be correct?

[DaveF1006]

Yes, let's break these questions down individually.

1. Since the sale of the home resulted in a net loss,  this should be reported on Form 1041. Losses from the sale of capital assets, like real estate, can generally be passed through to beneficiaries on their Schedule K-1 if this is the final return for the estate.
2. Capital Gains Taxation: You're correct that capital gains are typically taxed at the estate level unless the estate explicitly distributes the gains to beneficiaries. However, in your case, there's no gain—only a loss—so there'd be no capital gains tax to worry about.
3. The proceeds aren't taxable income and don't need to be reported on the return.
4.  There should be some income passed because of income and dividends reported. Some of this may be removed after removing the proceeds.

Please reach out if you have additional questions.

[MZVA]

So, on Schedule B, we have $1000 of distributable net income.  Turbo Tax asks if any distributions were made to beneficiaries.  If I say no, then no K-1s are created.  If I say yes, and report the proceeds from the sale of the house that were distributed, each of the 5 beneficiaries has $200 reported on their K-1.  I'm trying to figure out whether it is correct to report the house proceeds as distributions, thereby resulting in K-1s being produced, even though the income being taxed is not from the sale of the house.

[DaveF1006]

No. The proceeds wouldn't be reported as distributions since nothing was distributed. You should leave this information out of the return. The only activity on the beneficiaries K-1 should be their share of the income from Schedule B and the net loss from the sale of the house.

@MZVA 

[MZVA]

Thank you.  The issue is if I don't indicate any distributions have been made, we have $1000 of distributable net income but none of that is shown on K-1s.  Tbe K-1s are blank.  I would be happy to not have to provide K-1s for just $200 each, but I don't know if that is okay.

[DaveF1006]

It depends, if it is set up as a simple trust, or a complex trust. A simple trust requires an income distribution to its beneficiaries. 

A complex trust doesn't require a mandatory income distribution to beneficiaries, unlike a simple trust. In a complex trust:

1. The trustee can keep money in the trust, give only part of it, or even give out the whole amount if the trust terms let it.
2. Complex trusts can accumulate income, which is then taxed at the trust's tax rate—a consideration that may impact decisions on distribution.