No K-1 with a 1041?

[mactoolsix]

I need a little help filling out a 1041 for an inherited residence.

The facts:
My wife and 5 siblings inherited their mother’s house.
DOD: 3/25/08
Title is held in an Irrevocable Living Trust, which does qualify as a Grantor Trust under IRC Sec. 674 . . . . created 3/15/08
No one has lived in the house since DOD, and it was never listed to be, or rented.
The house appraised DOD $687,000
We immediately began necessary repairs, and listed the home in June for sale.
Looks like it’s finally sold May 2009
In Dec. 2008, I filed a blank 1041 with an election to capitalize 2008 interest & taxes.

I’ve read many posts saying this would be characterized as investment property. After repairs, taxes & interest, and sales expenses, there will be approximately a $135,000 loss.

Now the question:
The instructions for the 1041 say:

On page 11 under Grantor Type Trusts it states, "Do not use Schedule K-1 (Form 1041) as the attachment." How do we pass along the Capital Gains / Loss the beneficiaries upon the final return without a K-1? If we file a 1041 Sch. D Line 16 limits the amount to $3,000, then goes the Carryover Worksheet. I guess the concern is carrying the loss over to each beneficiary for their individual carry forwards.

Also, I recently read that Lacerte will NOT print K-1's for a Grantor trust. So what do I give each sibling? A 1041 Sch. D with a carryover loss sheet attached?

I has assumed the loss in its entirety will flow through to the beneficiaries on a K-1 and what happens then would be a function of their own personal tax situation. Some may be able to use the loss in one year (other capital gains) some may have to carry forward for a few years on schedule D.

Thanks for your time,
Mike

[fliszt]

1041

p.s. Don't forget about the option for a 6 mo from dod for asset valuation.
The irrevocable trusts I've done, the home was sold and I recorded it on the K-1s. Each beneficiary is allowed his portion of the tax free gain.
I have benefited much from Mr. Burton Koss' knowledge in trusts. You might look up his last message and get his email address and ask him for his opinion.
Larry

[Nashville]

No K-1

There won't be a K-1 until such time as there has been a distribution to the beneficiaries. The capital loss (if one exists) should be reported in total, and then the fallout from this will occur on the returns of the individuals. After all, some of the individuals may have other gains or losses, and this will just be one more ingredient in the batter mix.

Not sure about the failure to print. It may be that the accounting for the grantor trust by-passes the 1041 from the trust itself. I'll be the first to admit that I don't know how this works, and you'll probably get better advice from more knowledgeable people than myself.

Notice this is your first post. Welcome to the forum!

[mactoolsix]

No K-1

Nashville - There will be no distributions. There were no other assets and this is the "final" 1041. So I'm wondering how to "pass along" the loss to each.

Yep, first post. I read this forum a lot - the constant back and forth always seems to bring out the final good answer. I really appreciate all the information the members provide. This is just the first time (and surely won't be the last) I've had a question I couldn't figure out.

Thanks for the welcome,

Mike

[Gretel]

Aren't the sales proceeds from the house being distributed? In any case, a K-1 is needed to pass on the loss. Maybe you need to leave the box for Grantor trust unchecked?

[fliszt]

Mike, I'm wondering

how there is a loss on the sale of a home, which I'm guessing was purchased years and years ago. In either case, the sale will go on sched D and that will transfer over the the heirs on their K-1.
Larry

[mactoolsix]

No K-1

Gretel,
I stand corrected - of course the proceeds from the sale will be distributed, however there are no other assets to distribute.

The Irrevocable trust states that it qualifies as a Grantor trust, thus I don;t think I can not check the box???

Larry,
Yes the house was purchased in 1955. Step up in basis upon DOD.
Sch. D to show the sale, but how do I pass along the loss? just give them the schedule D and tell them to divide it by six? doesn't seem right.

Thanks,
Mike

[mactoolsix]

Sch. D - no K-1

Larry - I assumed I'd use K-1, however the instructions state not to attach a K-1 to a return for a grantor trust.

[fliszt]

Mike,

leave the "grantor trust" unchecked.
Then, what I've done with clients is to have them get a "formal" appraisel on the home. Yes it costs a few bucks but it may be worth it in the end. I was told years ago, ALL trusts are examined by eye from the dozens of attorneys they have on staff.
Anyway, once you have the formal appraisel on the dod, then the home is listed. Then when it is sold, the difference between the appraisel + fixup expenses will be the gain/loss. That goes on sch D. Then that will transfer to the K-1 for heirs gain/loss.

Sorry I forgot my manners before, but welcome to the board. There is an encyclopedia of knowledge here. Soon you will recognize the ones of vast knowledge. (not me)
Larry

[WhiteOleander]

Grantor trusts are taxed to the grantor. So, there is no K-1. We get "Grantor Letters" from our clients that tell us the income to be reported on the grantor's tax return. So, if this is indeed a grantor trust, the income, or loss in your case, is reported on whoever is the grantor's return. Not to the bene's.

[DTS]

Does a grantor trust exist after the death of the grantor? Not sure. I did not think it did. There are some great trust people here, where?

D

[mactoolsix]

Grantor Trust no more

Does a grantor trust exist after the death of the grantor? Not sure. I did not think it did. There are some great trust people here, where?

D

DTS - you got it! I just received an email from BKoss explaining that when the grantor dies, the grantor trust is no longer, thus the instructions pertaining to a grantor trust do not apply.

Thanks to everyone for your help in kicking this one around and finding an explaination,

Mike

[DTS]

Mike

Burton Koss is one of, if not the best, on several issues. Trusts being one of his specialties. So glad he jumped in for you!

D

[Snaggletooth]

TTB reference

If indeed this is a grantor trust. There is a definition of this which causes one to think. See TTB Small Business Version, page SB10-20.

If anyone is reading this, I'm wondering about the three bullets on page SB10-20 under the caption Power to control beneficial enjoyment.

I'm having a hard time understanding these three conditions. Are these conditions necessary or sufficient? (Necessary = all must be true) (Sufficient = any can be true).

[fliszt]

See Mike ---

Mr. Koss is so knowledgeable on everything. He helps out a lot during tax season. I can't help but think he spends too much time helping us, instead of preparing tax returns. He is sooo valuable -- as others will attest to.
Glad you got your answers
Larry