Simple Trust Rental Loss on 1040

[Gretel]

Unfortunately, the special loss of $25,000 is not allowed for income coming from a simple trust. I was wondering if the admin expenses on the trust return must be allocated on the K-1 at the same % as income items are or if I have the option to allocate less admin expenses to rental income to increase deduction of rental expenses.

[Gretel]

Found my answer, can allocate as I like as long as income before depreciation does not go negative.

[Gretel]

I need to get back to the issue of this loss being disallowed on the 1040 since I do not find this information clearly anywhere. If a simple trust is prohibited for taking the special allowance since the property belongs to the trust, the bene reporting all the income is prohibited as well since the property does not belong to her and comes from a prohibited flow through entity. I hope someone can confirm my understanding of this.

[Burke]

That is correct, and it applies to any trust, not just a simple trust. The loss stays within the trust (suspended) and is taken by the trust when the property is sold. If the property is distributed to the beneficiary because the trust terminates, or because the terms of the trust state that it is distributed at a certain age, etc., the suspended losses go with the property to the beneficiary. It may then be possible for the bene to take such losses on their tax return in that year, depending on their own tax situation and income. If the trust has net income and there are distributions to a beneficiary, then it is possible for income to pass through. If the rental property has a loss, then there is probably not any income to pass through unless it comes from another source.

[mastertaxguy]

Trust Real Estate Losses

May want to take a look at Tax Court Case Aragona Trust, 142 TC 9 (3-27-14) regarding trusts being able to use rental losses and qualifying under Sec. 469(c)(7). That may, or may not, apply to the poster's scenario.

[Gretel]

Thanks, Burke and Mastertaxguy. Section 469(c)(7) does not apply to my trust. Trust will have enough rental income again latest in 2016 because of 3-year leases, this loss then will be used by trust, right? The depreciation made the activity a loss. The is investment income and I have applied the admin expenses all to investments.

Burke, just FYI, this is the same trust I talked about before. I have learned though lots of research that the joint trust was set up very wrong. Taxpayer will need to consult tax lawyer to find out the consequences, mainly for basis for future sales. There is also a great chance that part of this trust is considered to be a grantor type trust. Since she is the co-grantor, trustee and bene at this time, I do not see that this has adverse affects on the tax liability - little to nothing to be gained for cash flow from this trust, especially after 2014. Attorney should be......

[Gretel]

I said something wrong, there was no loss before depreciation, therefor trust does not have a passive activity loss. Depreciation followed distribution to bene and bene needs to wait until this loss can be used in 2015 or 2106.