Schedule K-1

Forum|Forum|4 years ago
April 6, 2022
1 reply
11 views

So, my parents passed away last year and had twin (revocable) trusts, each with only half their home in it (and nothing else). The home was valued upon death by a broker at a value that was substantially more than it sold for about 3 months after their deaths. After realtor commissions, the net sales price was a lot less, say 50k. There were also a lot of other expenses in liquidating the estate which, I was told, can be assigned to the trust if I want, but I digress. The cash from the sale was placed in a trust bank account that earned no interest before being paid out to 5 beneficiaries. One of the five beneficiaries told me their accountant was asking if the trust would be supplying a Schedule K-1 and it made me think - oops, I guess I was supposed to handle that! A NOLO press executor book says that all beneficiaries who get distributions should get a K-1. Elsewhere, I read that the schedule K-1 is only necessary if some of that distribution is income. Does anyone here know which is true?

Someone else suggested that, even if the answer above is that no K-1 is needed due to no income, if the trust had a loss, which it did, that we might still want the Schedule K-1s issued so that the tax loss could be shared by beneficiaries. I wonder how much sense that makes given that the home sold within three months of death, for a value that is probably a more reliable indicator of value at death than some pre-sales-commission estimate done by a broker. One of the beneficiaries cannot use a tax loss and does not want any trouble with the IRS! Thanks so much for any help.

Not A Product Question

Best answer by Anonymous_

Very helpful. I think the March 15th is for K-1s for pass through entities only. Does that sound right? Is there a better link for reasonable expenses specifically. That just brings up a huge document. Presumably, even clearing out all the house contents and valuing them are reasonable costs if the trust's only asset was the condo and it was soon thereafter sold, right? We paid for airfares and meals for those who helped do it.

Regarding: The income that you received was $630,000 which is considerably more than the $600 thresh hold. You and I know it is a loss. The IRS does not know. The tax return is how you tell them.

I think I get the theme even if the details seem backwards. The house sold for net proceeds of 602k after being valued at 665k, but the latter was not net of realtor commissions. Is the loss the full 63k (in addition to other estate settlement expenses addressed above) or should both have some realtor commisions? And you continue to use the word income, but isn't the 602 just a distribution, and not income. Indeed, it is a loss which seems to be the opposite of income.

Sorry for the "bleep" in my last post. I was using a word that is the first 4 letters of my job, which is as an analyst. Thanks much. Hopefully this will be my last question although I seem to be getting automated kudos for asking more and more questions, rather than slaps on the wrists! Dean

The March 15th deadline (or three months after the close of the tax year) is applicable to S corporation (1120-S) and partnership (1065) returns. C corporations and estates and trusts that adopt a calendar year have to file by April 15th (or the fourth month following the close of the tax year).

DianeW777

Level 15

Since the home was in the trust, sold by the trust and funds placed in the trust bank account until distribution there really is a need to file the trust return. Income of $600 or more meets the filing requirement of the trust (Form 1041). The fact that the home sold for $50,000 is income. Filing shows the IRS the cost basis that eliminates the income and actually creates a loss. In the process you can also include estate expenses.

The loss is then distributed to the beneficiaries and if it was not their home, each will have a capital loss to report on their tax returns.

Even if one or more of the beneficiaries 'cannot use the loss' it is carried over until it is used up.

Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.
Form 1041 Instructions (click the link)

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richardkutta4

Level 2

Response from is on target. When I had same estate administrator responsibility, I found TurboTax Home & Business very helpful in preparing trust returns and producing K-1s.

Anonymous_

Level 15

@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.

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.

@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....

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.

@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.