Where to report sale of Rental property in a Trust return

[Trusteeof3]

Trust grantor died in September of 2021. She had a rental property that was not rented in 2021. The rental property was in a living trust that converted to irrevocable when she died. It is a complex trust. It sold in December for $120k less than the appraised value. How do I report the sale of the property? TurboTax only gives options of 1) Decedent's home or 2) Investment home (non-rental).

Do I have to report the cancellation of depreciation recapture somewhere?

Do I have to report it as a rental if it was not rented for several years? The past personal taxes have not been filed yet, so I'm thinking I can say it was taken out of service after the last renter left and thus classified an investment home. Or can I pass through a loss to the beneficiaries by keeping it a rental?

[Anonymous_ · Accepted solution]

It appears as if the property is "investment property" and the sale should be entered accordingly.

On the final return for the trust, the loss can be passed through to the beneficiaries.

The previous (accumulated) depreciation disappears upon the death of the grantor and the property receives a stepped-up basis (to fair market value on the date of death).

[Trusteeof3]

Thank you so much, @Anonymous_.  So I enter it all in the dialog for "Investment Home" even though it says "(non-rental)"?

Will I pass the loss through to the beneficiaries on their K-1's?

Do you know if I can deduct the 3 1/3% California Franchise Tax Board withholding?  If so, is it a closing cost?

Do I need to report the disappearance of depreciation anywhere?

[Anonymous_]

Yes, it is apparently not a rental but apparently is investment property (since it is not held for personal use).

The loss will pass through to the beneficiaries on their K-1s when the final income tax return (1041) is filed.

[Anonymous_]

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@Trusteeof3 wrote:

Do I need to report the disappearance of depreciation anywhere?

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No, you do not need to report that anywhere.

Also, any tax paid to the State of California would be deductible on the 1041.

[Trusteeof3]

Thanks so much.  So on which form will the mortgage interest for the investment property that was paid after death (Sept-Dec) be?  TT is filling out Schedule E for a 1040, so I must be entering it wrong.

[Anonymous_]

I was under the impression that you were working with TurboTax Business and a 1041(?).