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Old 01-28-2013, 03:29 PM
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Irrevocable Income Only Trust - Real Estate Property Cost Basis/Distributions Question.

Hello,

For Income tax purposes, this trust is a grantor trust under provisions of Section 677(a) of the Code. it was created in Nov 2007 and it has finally sold its only asset, a house, in 2012.

We are preparing the 1041 form for the final year and wanted to know how should I calculate the cost. Would step-up or carryover basis apply, and when? do we use the cost of the house at the time it was given to the trust? the original price? or maybe the date of death when the last trustor died?

Also, after the house was sold, the trustee distributed the proceeds of the sale of the house to the beneficiaries. Do we need to give them any kind of paperwork? Assuming there was no gain on the house, would they receive a K-1 form after we file the 1041 for the distributions of sale of the house?

What if there was a loss?

Thanks,

J



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Old 01-28-2013, 05:57 PM
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Issue: stepped-up basis

If the grantor has passed away and the real estate was included in their estate, then a stepped-up (or down) basis is generally allowable. It would be necessary to review the decedent's 706 (if available) or an estate valuation for proper documentation. To determine a gain, a breakdown of the HUD statement is necessary to determine which expenses may be taken in determinig the selling price. For the beneficiary's peace of mind, a K-1 should be sent even if there is no taxable income as a result the distribution.

If the the grantor is still alive, and the trust is terminating due to the sale of the real estate, then a grantor letter should be sent out. Note, there would be no step-up in basis available to the grantor. The beneificiaries receiving the distribution would not have a reporting requirement connected to the sale since the grantor would be responsible.



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Old 01-29-2013, 12:54 AM
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“We are preparing the 1041 form for the final year and wanted to know how should I calculate the cost. Would step-up or carryover basis apply, and when? ======>In general, a trust has a "carryover" basis, meaning the trust has the same basis as the grantor. There are exceptions. If the trust is a testamentary trust, and the grantor is dead, the property obtains a new basis, equal to fair market value.
“do we use the cost of the house at the time it was given to the trust? the original price? or maybe the date of death when the last trustor died?”=====>.FMV of DOD is the basis. It is a complex trust when the grantor died. Form 1041 needs to be filed as long as the trust meets the filing threshold. Income prior to DOD needs to be reported on the grantors’ 1040. Income received after theDOD needs to be reported on Form 1041.


“Also, after the house was sold, the trustee distributed the proceeds of the sale of the house to the beneficiaries. Do we need to give them any kind of paperwork? Assuming there was no gain on the house, would they receive a K-1 form after we file the 1041 for the distributions of sale of the house? “====>An estate or trust’s income retains its character, and so beneficiaries must be informed of this character. The Sch K-1 ofForm 1041 gives the beneficiary the specific allocation between all items of income, allowing easy transfer from the K-1 to the beneficiary’s Form 1040.When there is one income beneficiary, the total amount of the income distribution deduction (IDD) is shown on a single Schedule K-1, with allocations made between the different types of income. When there are multiple beneficiaries, you’re required to prepare a separate K-1 for each, with the total IDD divided among the beneficiaries on their K-1s in the same proportion as the distributions were made. Sch K-1 allows your beneficiary to separate his or her income distribution into all the sorts of income received by the trust or estate. Because it is an attachment to Form 1041, you must distribute a copy of it to the income beneficiaries no later than the due date for Form 1041, as extended. Remember, the beneficiaries can’t prepare their 1040s until they receive their K-1s from you. Distributions from the trust to a beneficiary create a new set of potential tax liability issues. Federal income tax laws and state income tax laws in those states that actually collect an income tax do not consider trust distributions to be income for the beneficiary. Therefore, trust distributions do not create income tax liability for the beneficiary. However, several states impose an inheritance tax on trust beneficiaries. The inheritance taxes generally have a minimum threshold, which means if the trust distribution is small enough, then you will not need to worry about the inheritance tax. If your distribution from the trust exceeds the minimum threshold in your state, then you as the beneficiary may have to pay some inheritance tax to your state government.



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Old 01-29-2013, 05:44 AM
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Response

First, if the grantor is still alive, there is no "income distribution deduction". The trust must provide a grantor letter under the rules set out in IRC 671-679. Therefore, there would be no stepped-up (or down) down basis. Second, the Schedule K-1 for federal tax reporting requirements if the grantor has passed away is related to the income distribution deduction the trust is allowed to take on federal Form 1041, but is not necessarily the amount of income distributed by the trust to the beneficiaries. The amount available for a trust to deduct on Form 1041 and reported to on the beneficiaries K-1's is based on the trust instrument. At the time of death, the trust would become irrevocable, and the trust would either be considered simple or complex. For either type of trust, a calculation must be made to determine the distributable net income (DNI) and trust accounting income (TAI). For a complex type trust, the lesser of the amount distributed or the DNI is the amount allowed as an income distribution deduction on the 1041 for the trust & then reportable to the beneficiaries on a percentage based on the share they received. For a simple type trust, the lesser of the TAI or DNI is the amount allowed as an income distribution deduction on the 1041 for the trust & then reported to the beneficiaries on a percentage based on the share they received. Note, if the trust is fully distributed and is filing a final form 1041, long-term and short-term capital gain carry-over losses are also passed out, but a loss taken on a sale of the residence would not be allowed on Form 1041 and therefore could not be reported to the beneficiaries. With that said, there is no federal reporting requirement to send out a K-1 to the beneficiaries if there is no income distribution deduction available to the trust (i.e. no taxable income received by the beneficiaries). However a trust may send out a blank K-1 to the beneficiaries stating there is no taxable income to alleviate potential questions from the beneficiaries' tax preparers. Finally, states vary in their reporting requirements, and an examination of the local statute for where the trust has a tax situs would be needed to determine what forms to be filed. Inheritance tax would be an estate issue, and not reportable on a K-1 prepared in relation to the trust. The threshhold amount for an inheritance tax varies greatly among the states.



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Old 01-29-2013, 11:43 PM
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Basis

The estate valuation is needed to be examined. It is not necessarily true the stepped up basis would be the date of death. It is possible the estate valuation used the alternate valuation date. If this is true and the house was sold before the alternate valuation date and after the decedent's death then the basis would be the date of sale. Also, HUD statement needs to be reviewed.



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Old 02-01-2013, 01:58 PM
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Thank you for all your responses. They are great!

Update: Both Grantors of the Trust are dead now, and there was no income from rent or anything else from the house, which was the only asset.

The trust was created in Nov 2007, do I need to find out the date of death of both trustors (husband and wife)?

I am not really familiar with Real Estate lingo but when you guys mean estate valuation, do you mean when someone came in and decided what the house is worth? like an appraisal?

I have the HUD statement, what would I be looking for?

If the basis/cost is the Date of Death of the last person in the trust, how could I possibly find out the price? Do I just estimate? We are a little confused in that sense because house prices were high back then so I would mean that we have a loss now?


Thanks!



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