'nother teaser - Estates

[Snaggletooth]

Rivers died with estate valued at $500,000 Assume this amount includes $20,000 in cash and $480,000 in land for purposes of this question. He has no "Estate Tax" to file for federal purposes.

However, his heirs agree to wait a few years before settling his estate. A FEIN # was set up for filing a 1041 every year until the estate was settled.

The land rents to a soybean farmer/operator for $5000 per year as was the case with the deceased in the last few years before his death. Taxes and insurance cost the operation $10,000 per year. A 1041 is filed with a $5000 loss in year 1, and in year 2 as well, with losses totalling $10,000 for those two years.

One of the beneficiaries has seen land values plummet in recent years, and forces the other heirs to sell the land and close the estate. The land nets $480,000 upon sale, the remaining cash is split and the estate is closed with no profit or loss in the final year.

The final 1041 is filed, with K-1s distributed to the beneficiaries. The K-1s should total:

a) $0 because there was no income or loss in final year and no gain/loss on land sale.
Prior year losses are irrelevant.

b) $10,000 loss because the beneficiaries never received a K-1 for the two previous yr losses.

c) $10,000 loss because the estate has lost $10,000 in value since its inception, even though a K-1 was not appropriate for previous years' reporting.

d) $????

[Roland Slugg]

(d) I wish I owned real estate whose value "plummeted" from $480K all the way down to $480K during the past three years.

[AJsTax]

!. I think you meant to say that the Estate, not the farmer, had taxes and insurance of $10,000.
2. You say the "net" of the sale of the land is exactly the same as the original basis? Even after all costs of the sale, estate administration, etc.?
3. Without pulling out my book and checking, I seem to remember suspended losses carrying to the K-1. Don't have time to look up today.

Interesting question however it turns out!

[Gretel]

Pulling from memory: Shouldn't all losses pass through to benis upon final return? Rental losses plus fiduciary fees plus accounting fees? Are any of these losses deductions included in your "net" calculation?

[Nashville]

Simplicity

It has been noted that there are convenient circumstances built into the scenario that are not in the real world. Such as real estate not declining in three years, no other expenses getting into the calculation, and a suspiciously coincidental selling price/realization exactly equal to the estate appraisal. No one has mentioned it yet, but also what are the chances of a zero profit/loss in the final year? Practically zilch.

Bees had this same problem last year when he presented his short scenarios and brainteasers. People would try to "read in" factors not given. His consistent response was not to assume any facts other than those given. By the way, Bees, if you're out there, we'll look forward to a few more of these during this off-season.

Addition of such factors are obviously "real world" but the inclusion of such factors only make the question more cumbersome and leads the reader away from the real issues at the heart of the question.

I'm leading toward answer c) to include the accumulated losses on the final K-1, but I'm convinced it is not b) because until there is a distribution, there can be no K-1.

[Burke]

I am also going to assume the third paragraph intended to state that the Estate had taxes and insurance of $10,000, not the farmer. This produces a $5,000 net loss.

An estate or trust is subject to the passive activity loss limitation the same as an individual, with the exception of the $25,000 rental real estate offset. An estate is eligible to take advantage of the $25,000 exemption allowing rental real estate losses to offset other income. (Trusts are not allowed the $25,000 exemption.) However,(1) to be eligible, the decedent must have actively participated in the rental activity. (2) This special rule applies for taxable years ending within the two year period following the decedent's date of death.

It is not stated whether the decedent met the first rule. Also, it is not stated whether there was any estate income to apply this net loss to. So let's assume the answer to both is no.

Passive losses incurred and suspended by an estate or trust are suspended at the entity level and may not be passed through upon termination of the entity.

So the answer would be A.

[Snaggletooth]

Clarity

Thanks to everyone who has answered, and the answers are far from consistent.

I have gone back to edit the original post to add more qualifiers because everyone believes the OP lacks clarity. Of course, the OP is now longer, has more twists and turns for the mind to follow, with virtually none of the changes really affecting the issues at hand. I think fewer people will be inclined to read it.

If interested in reading this thread, don't assume or introduce additional facts not given. But I do appreciate the posts and the interest in the subject matter this far.