Trust Tax Return with negative taxable income but depreciation not calculating right

[katfox1]

Preparing trust return with sale of rental property at a loss which causes negative income.  K-1s are blank but the program has allocated the depreciation to the beneficiaries but it does not show on their K-1s and the carryover loss is reduced by this depreciation!  There is obviously something wrong.  Is it okay to override the allocation of the depreciation to the beneficiaries and allocate it to the trust or do I need to manually enter the depreciation on the K-1s even though there is no income in the boxes above?  The program is also showing accounting income without the depreciation deduction.  Should I also override the accounting income?  Also I need to edit Schedule E to show the depreciation on the property's Schedule E which was left off because the program allocated it to the beneficiaries.   I did try doing this and it fixed the carryover loss problem but did nothing else.

[Anonymous_]

Except under certain circumstances, and depending upon the language in the trust instrument, depreciation typically follows income and is allocated as such. 

Further, net losses on sales of trust property are not passed through to beneficiaries until the trust terminates and files its final return. If you are preparing the final return for the trust, indicate that in the About Your Trust or Estate section of the program.

[katfox1]

Okay. This did not answer the question.  Not the last year of the trust.  K-1 is blank.  Rental property sold at a loss which is more than the trust income but software continues to assign the depreciation to the beneficiaries but K-1s are blank so it is not really assigning it and carry over loss is reduced by this depreciation that it thinks is assigned to the beneficiaries but K-1s are blank.  Basically there is no income so why is the software assigning the depreciation to the beneficiaries???  Okay to override and assign it to the trust?   So the depreciation should follow the negative income?  Is that what you are trying to say?

[Anonymous_ · Accepted solution]

It is trust accounting income (TAI) that is relevant. What are the terms of the trust? Are you. as trustee, required to distribute all income (TAI) currently?

Review your 1041 in Forms Mode, specifically, your TAI on the worksheet on that form. A rental property sold at a loss should not affect TAI.

Please note that tax scenarios where trusts/estates own (and dispose of) depreciable assets are somewhat complex. You might want to consult a legal and/or tax professional for guidance.