My client received both income and depreciation from a Simple Trust. The depreciation was greater than the income. My client is the only beni and she would qualify as a material participant. I know that trusts can't avail themselves of the special provisions for deducting losses due to the $25,000 rule so I assumed this could not be utilized by a beni either. I would have thought though, that this beni could claim the loss due to her material participation. However my software won't allow it. Is this correct that rental losses from trusts are only able to be utilized if there is passive income?
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That is correct. Trusts are not allowed the $25,000 exemption. Passive losses incurred and suspended by an estate or trust are suspended at the entity level and may not be passed through even upon termination of the entity. You state "my client received both income and depreciation from a Simple Trust." She could have received net rental income on the K-1, but not if there was a loss. How did she "receive depreciation?" -
Depreciation
The Trust K-1 showed income of $3,080 on line 7 and depreciation of $7108 on line 9A.
These then net to a negative $4028 which got locked up as non deductible on the beni's Form 8582. I thought maybe as she was a material participant that the loss could be utilized without other passive income.
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Simple Trusts and Passive Losses
I found an IRS document that states passive losses can't be passed through to a benificiary even in a Simple Trust. Passive losses stay in side the trust. Problem solved.Comment
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