Reporting Net Rental Real Estate Loss on K1 from Trust

[TLLau]

I'm trying to see whether I can duplicate the 2023TY 1041 that my CPA prepared for me.

I'm preparing the 1041 for XYZ trust that owns rental properties. There is only 1 beneficiary who will also receive other K1 with positive rental real estate income from ABC trust. The net rental real estate income from XYZ trust is negative because expenses and depreciation exceed rental income.

The Sch K1 that my CPA prepared has a negative rental real estate income ($-17,597) on line 7 ("Net rental real estate income")

I am not able to get TurboTax Business to generate a Sch K1 with negative rental real estate income. The loss stays with the trust; it is not transferred to the beneficiary.

Any thoughts on what I'm doing wrong? If I'm not mistaken, the negative rental real estate income should flow to the beneficiary so that it can offset other positive rental real estate income received from the K1 of ABC trust.

[Anonymous_]

Net losses remain within the trust until the passive activity is disposed of by the trust (or the activity is distributed to the beneficiary).

You should see Form 8582 if you enter Forms Mode.

See https://answerconnect.cch.com/document/arp286507e6d87b6c10008d3c001b7840a5b202c5/federal/irc/explana...

[Mike9241]

we do not know what type of trust XYZ is. the other issue is we can't see schedule B of XYZs 1041. Normally for there to be a distribution there must be Distributable net Income but with a loss that would be 0.   there would be an exception to this if XYZ was a grantor trust or the trust has terminated. Just too much unknown to give a definitive answer

[Anonymous_]

There are some unanswered questions here. 

However, if each trust is issuing a K-1, then neither would be a grantor trust (either that or the 1041s are being prepared improperly).

[TLLau]

XYZ trust and ABC trust are both simple irrevocable trusts; they are both not the final return.

How do I specify in TurboTax that the activity is to be distributed to the beneficiary, as you mentioned?

[Anonymous_]

Those net passive losses remain within the trusts and can be offset by passive income on future 1041s.

The losses are not distributed to the beneficiary(ies) until the trusts terminate and file their final returns.

If the trusts distribute the passive activity itself, the passive losses will follow.

[TLLau]

tagteam,

I understand your reply that as a rule, passive losses remain within the trusts.

But you said that "If the trusts distribute the passive activity itself, the passive losses will follow." My question then is how do I get TurboTax to recognize that the passive rental activity should be distributed to the beneficiary? Is this possible in TurboTax Business?

[Anonymous_]

Did you actually distribute the activity?

That means the trust would distribute title to the rentals. Is that what happened?

[TLLau]

Thanks for the clarification. If I understand you correctly, distribution of activity interest is re-titling the rental property in the name of the beneficiary. That did not happen last year, but will happen this year.

[Demla]

Cannot type on box 1 in K1 with negative number. It is grayed out. Cannot let me type anything

[killerf1]

TurboTax Business might be keeping the loss at the trust level because passive losses aren’t always distributed automatically. Make sure you’ve marked the rental income as distributable to the beneficiary and check that passive losses are set to flow through. If it still doesn’t work, compare it to your CPA’s return for any special settings or overrides they used. If needed, reach out to TurboTax support or your CPA for guidance.

[M-MTax]

---

@killerf1 wrote:

Make sure you’ve marked the rental income as distributable to the beneficiary and check that passive losses are set to flow through.

---

Yeah, it doesn't work that way and you have to be careful with suspended passive losses in an estate or trust.

This is similar to situations that occur when decedents have suspended passive losses on the date of death. Those passive losses are absorbed in connection with the stepped up basis and can be utilized only to the extent the PALs exceed the stepped up basis. If they do not, they are simply lost.

Otherwise, if an estate or trust actually distributes the passive activity, any suspended losses serve to increase the basis of the property so distributed.