Schedule K-1

[Anonymous_ · Accepted solution]

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@taxdean wrote:

Or is the appraiser supposed to subtract what he thinks are market sales commissions?

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No. An appraisal does not factor selling expenses into the equation. Selling expenses can vary from next to nothing to a rather large percentage, depending on the transaction and the agreement between the buyer and seller.

[Anonymous_]

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@taxdean wrote:

It was their estate attorney who told me a broker valuation would suffice although that WAS after my mom's passing which was three months earlier than my dad's.  

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The broker valuation should suffice and, honestly, it will, in all likelihood, never be question.

However, the IRS is not obligated to accept that valuation. 

[Anonymous_]

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@taxdean wrote:

.....while he may have implied that only certain types of expenses are eligible, he did say that since the trust would be the only estate entity filing a tax return, that all expenses of liquidating their estate could be assigned to the trust....

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Yes, all expenses may be expenses incurred by the trust, but note that the regulation (to which I linked in an earlier post) applies to both estates and non-grantor trusts.

https://www.law.cornell.edu/cfr/text/26/1.67-4

[taxdean]

<< "commonly or customarily would be incurred by a hypothetical individual holding the same property" >>

I am having trouble interpreting even this and even more trouble trying to interpret the Cornell legal document.   Regarding the quoted phrase above, is it referring to a scenario where the assets being sold are being sold by the decedent prior to his passing, but not inside a trust or even with no legal estate documents, or is it simply referring to someone else LIVING there, i.e., not selling the condo.  Can someone please help me?  Perhaps if I provide some examples, your answers will help me to understand the general principle at work here.  The majority of the expenses incurred were costs that the decedent would never have spent if he was still alive and living there - indeed, he didn't, but costs that a selling agent would have recommended be spent to (cost-effectively) get top dollar, repairing broken things and making the home presentable to potential buyers.  Alternatively, the condo may have sold with a credit for repairs which, I would think, would impact the 1041 return in a similar, although probably more costly, way.  In general, rather than paying beneficiaries (and spouses) some hourly rate, they worked for weeks getting the place in selling condition, and accepted reimbursement from the estate for travel, a bit of hotels, and meals.  The central AC was found non-working, first repaired, and then replaced.  Many simpler repairs were done during that three weeks.  Then, there were commissions and also clean up costs paid for NON-TRUST (personal possessions, I guess) non-trust collectibles to prepare them for selling and to sell them, all at a loss compared to the valuations that were also paid for.  [As I understand it, those losses due to selling personal possessions are not deductible at all].  Then there were payments for final medical bills and funeral expenses of the deceased; also utilities during the period when the condo was not yet sold.  I am guessing that professional fees associated with the estate tax returns and attorneys fees are deductible.  Thank you!

[Anonymous_]

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@taxdean wrote:

Then there were payments for final medical bills and funeral expenses of the deceased; also utilities during the period when the condo was not yet sold.  I am guessing that professional fees associated with the estate tax returns and attorneys fees are deductible. 

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Funeral and medical expenses are not deductible on Form 1041.

See https://www.irs.gov/instructions/i1041

However, expenses for preparation of fiduciary income tax returns, the decedent's final individual income tax returns, and all estate and generation-skipping transfer tax returns are fully deductible (same link).

[Anonymous_]

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@taxdean wrote:

Regarding the quoted phrase......is it referring to a scenario where the assets being sold are being sold by the decedent prior to his passing, but not inside a trust or even with no legal estate documents, or is it simply referring to someone else LIVING there, i.e., not selling the condo.  

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It is referring to a scenario where an individual is selling an asset in the same manner as the estate or trust would be selling an asset. In other words, a hypothetical individual would incur the same expenses as the estate or trust if the asset were being sold (or being prepared to be sold).

Note also that ownership costs are also incurred by individuals and, therefore, are not deductible by an estate or trust if they would be considered miscellaneous itemized deductions.

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@taxdean wrote:

I am having trouble interpreting even this and even more trouble trying to interpret the Cornell legal document.

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As an addendum, the link I posted is to a web site that is, indeed, hosted by Cornell (the Legal Information Institute), but the content is not a "Cornell legal document". Rather, it is a Treasury Regulation issued by the Treasury Department which is an official interpretation of the Internal Revenue Code and source of U.S. tax law.

[taxdean]

OK. so i think you have focused me toward concentrating on costs that are unique to the estate owning the condo rather than if it were a normal sale by the owner prior to becoming deceased. Is that about right?

Obviously I am showing my ignorance, but please permit me this question:

I always thought, at least in a normal, non-estate, home sale situation regarding capital gain taxes and such, that near-term costs in preparing a home for sale were (directly, not 'miscellaneously') deductible.  I assume that a home improvement added between the time an appraiser valued the property and when it is sold, would increase the "cost basis" and therefore would be, in effect, deductible under (A).   Is that correct? But are you, in essence, saying that repair and other costs to maximize value, incurred after the appraiser did its on-site valuation, are not deductible?  Yet, if the repairs were not done and the buyer was given a credit for them, that would clearly impact the loss, right?   If so, would the advice implied by that seeming contradiction be to plan to give credits in escrow rather than paying contractors to do the fixes before the home is put up for sale?

Thanks much!

[Anonymous_]

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@taxdean wrote:

I always thought, at least in a normal, non-estate, home sale situation regarding capital gain taxes and such, that near-term costs in preparing a home for sale were (directly, not 'miscellaneously') deductible.  

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No, that is not the case and has not been the case since 1997. The Taxpayer Relief Act of 1997 eliminated any deductions for "fix-up" and/or repair expenses prior to the sale of real estate. 

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@taxdean wrote:

...I assume that a home improvement added between the time an appraiser valued the property and when it is sold, would increase the "cost basis" and therefore would be, in effect, deductible....

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Yes, home improvements are different; they are not treated the same as repairs. Rather, improvements are added to the basis of the property and effectively reduce gain (or increase loss) on a subsequent sale.

Similarly, a credit given to the buyer would increase any loss (or decrease gain) but, regardless, any pre-sale expenses incurred (other than actual improvements) to make the property more attractive to a buyer are simply not deductible expenses.

[Anonymous_ · Accepted solution]

@taxdean 

I just noticed a couple of lines in your posts. One was that a CPA is preparing the final return for your parents and the other is the following sentence:

"I am most worried about doing my job correctly as the trustee (and executor) and not being subject to a lawsuit."

I have one question: Why is the CPA not preparing the 1041 for this trust?

I have one statement: Probably the quickest and most assured way to fail to do your job as trustee and executor (and be subject to a lawsuit as well) is to not use competent and qualified professionals for various tasks related to wrapping up the estate and terminating the trust (including filing state and federal tax returns, and any other required documents).

You have a fiduciary duty to use (at a bare minimum) reasonable care in performing assigned and mandatory tasks and that reasonable care standard requires employing qualified professionals for tasks that you are not qualified to handle yourself.

[taxdean]

So you surmise that I am not competent to do this myself?  Just kidding! 

That is a very valid comment.  My parents long-time CPA also passed away recently, as did their long-time estate attorney.  So, I had to hire new folks for both and the new CPA had already agreed to do my parents' final year tax return, starting around April 12th but, until one of the beneficiaries' accountants asked me about whether the estate would supply K-1s, I did not realize that I had only sent the CPA data for the personal tax return not any 1041/K-1s.  So, I have notified him and I think, once I supply him the raw data so many of my questions have been about, he will get the 1041 and K-1s done in time and I will get what I get pretty close to the April 18th deadline.  Perhaps the answer is to file for an extension but, I think, that means all 5, count 'em, beneficiaries will have to put filing their personal tax returns on ice, or amend them later, none of which sounds good for me.  One of the other beneficiaries is actually a co-trustee and co-executor, but he is not financially savvy and did not catch this lack of advance notice either; actually it is his accountant that recently asked the question about K-1s.

I completely understand the spirit of your advice and it is a good and timely reminder.  Realistically, none of these family members would sue me, but I just feel an obligation to protect their interests by being the only one who seems to have the capability of becoming semi-informed.  I am disappointed in myself, believe me.  There have also been many other facets of their estate, interests outside of their trusts, including bad record keeping and bills not paid by them, etc, that have consumed so much of my time, in my defense.

Thanks!

[Anonymous_]

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@taxdean wrote:

So you surmise that I am not competent to do this myself?  Just kidding! 

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Please believe me: that is by no means intended to be the least bit derogatory. There are plenty of CPAs and tax attorneys who need assistance with matters related to gift/estate tax and estate and trust income tax returns and the issues involved. Further, I believe you mentioned Florida (I presume your parents were residents at the times of their passing?), but also California and the latter state might require a return be filed if a resident beneficiary receives a distribution. 

[Anonymous_]

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@taxdean wrote:

Perhaps the answer is to file for an extension but, I think, that means all 5, count 'em, beneficiaries will have to put filing their personal tax returns on ice, or amend them later, none of which sounds good for me.

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I understand but it appears as if you will, at best, be distributing a net loss to the beneficiaries which, depending upon the amount and each beneficiary's personal financial situation, might not make much of a difference in their tax liability (at the very least, they should not owe any additional amount). So, the end result might be one or more would not even need to file an amended return.

[taxdean]

I hear you.  This CPA is very seasoned and I believe he will ask any questions that require clarification from me; although it is tough to know what I don't know, in order to assess his capability in an area where, as you say, even professionals can need help.  Yes, they were residents of Florida when they passed but none of the beneficiaries live in no income tax states.  Regarding  your reference to state returns, i am a bit confused.  Someone, was it you, said the only K-1 the estate would need to generate would be the federal K-1.  Are you saying that might not be true?  Or are you simply saying some beneficiary who might otherwise not need to file a state income tax return might now need to.  Or are you saying something else entirely?

[taxdean]

Good points.  At least two,definitely including myself, maybe three of the 5,could probably use it.  The ones that I worry the most about probably don't need/can't use, a tax loss, at least not now.  Do they have to apply 3,000 a year, even if it is of no or minimal benefit to them, or can they defer it until a future year when they think they maybe could use it to more advantage?  Thanks.

[Anonymous_]

They would apply $3,000 per year (up to that amount to offset other income) and the balance would be carried forward.

If a distribution is made to a beneficiary who is a California resident, a return may need to be filed. State laws vary.