Discussion:1041-Complex Trust Rental Loss Pas Through to K-1?

I am not the sharpest tool in the 1041 shed. I need help~

I have a new Trust Client. 1st year of trust and after reading the entire trust document several times over I can positively state it is a Revocable Living Trust. Grantor died last year. However the categorization of Simple or Complex is not stated in the document. Further the discussion of distributions is not specifically stated.

So I have come to the conclusion (perhaps incorrectly) I can pick Complex....because we like the idea of the flexibility of not having to distribute income every year and having the trust bear the burden of taxation. Any dissenting opinions?

Further; in year one the trust; which holds rental property had $8k in rental losses. Executor participates actively. These losses are flowing through to the K-1-offestting some income on his 1040. Cool

However; lets say in year 2 the rental property operates at a gain. Can we hold the income at the trust level and pay taxes at the trust 1041 level and not distribute this income over on the K-1's?

I appreciate your time and advice

B. A trust runs out of its 15% tax bracket at $2,300 of ordinary income making it not too attractive to fail to distribute. C.You don't "pick" Complex. If the trust instrument directs that all income be distributed, it's a Simple trust, otherwise its Complex, and if you fail to distribute all the income from a Simple Trust it becomes a Complex Trust that year.( there's a couple of other reservations) D. The only difference is that a Simple Trust gets a $300 exemption instead of $100 for a Complex Trust.

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What I think WesR failed to read was the fact that the executor/beneficiary participates actively in the rental venture held in trust. Active participation in a rental activity allows for pass through of the rental losses from 1041 level to the personal 1040 level. Executor is not a R/E agent, however he manages the rental property full time.

At the personal (1040) level on the Sch E one must indicate that the taxpayer participates actively for the losses to flow through to page one of the 1040.

Any dissenting opinions?

I understand this statement, however if this is a complex trust and we hold back ALL types of income/losses one year and elect to distribute ALL types of income/losses in a subsequent year is this allowed?

Question: You are stating that active participation by the trustees in the rental real estate venture that is generating a loss prevents pass through of this rental loss on the K-1's issued by the trust?

which is what WesR was saying also.

Can you provide a link of reference to help me gain more insight. I can do the heavy lifting if you point in the right direction?

Do I need to file 645 election to take advantage of the rental losses or is this impossible?

Bottom line: Is your opinion that Taxwise 1041 is prepared incorrectly if these rental losses are flowing through to the K-1's?

you don't make the §645 election, the trustee of the trust (in conjunction with the executor of the estate, if any) make the election with the input of their tax professional. This election should be convered at length in any 1041 preparation class, as there are several pros and cons that have to be weighed out.

If my answers to your questions seem curt, it is because it is much better for you to learn how to research and find your own answers than to depend upon others. The others could be wrong. If your profile indicates that you are a beginner, I tend to give quite a bit of slack, but if you have been practicing for several years or are an Enrolled Agent or CPA, then I do expect you to know how to find and read an IRS Publication and the instructions for a form.

We all have to start with zero knowledge and learn more every year. But I think it is malpractice to take on a client for which you don't have the necessary education to help them and don't have the time to get that education before completing their return. Don't do estates or S corp returns until you have taken an estate or S corp class, or at least purchased and read some CPE material on the topic. The same for representation. If you don't have the experience, then get the education at your own cost, don't practice on your clients, you will probably do more harm than good. The IRS instructions are a start, but they really aren't enough, otherwise everyone could do their own taxes and no one would need your expertise. If you are unwilling to take the necessary CPE to become proficient on a topic, then either turn the client away or get professional help to review your work.

I expect my fellow tax professionals to be true professionals. If you aren't willing to spend the time studying and taking CPE, then you should get out of this business. On the other hand, if you are willing to share what you have already researched but still have further questions, I'll be more than willing to help you.

The Grantor died on 7/7/07. Beneficiary filed a 1041 for 2007 and checked the box "decedents estate". He did not account for the real estate loss at all. He paper filed the tax return "stubby pencil"

I am thinking I must amend year one to account for the rental loss and file year 2 (2008) as well.

I think its too late to file the 645?

there seems to be confusion as to whether this is an estate or a trust - you say you've read the trust instrument but your client filed an estate return. Maybe he made the 645 election 'stubby pencil'?

On the paper filed 2007 return client did not check the box that states "Check here if filing trust made Section 645 election". I am certain he did not file a 645 election with the IRS.

CLARIFICATION: This is a revocable living trust that is now irrivocable as the grantor has expired.

Where does that leave me?

Search the IRS Website: "Passive Activity Loss ATG - Exhibit 6.2: Trusts: Passive Loss Issues"

Link: http://www.irs.gov/businesses/small/article/0,,id=146842,00.html