Expenses of Life Estate in residence of deceased in Trust

[lshuling]

Trustee of the Trust has been provided a Life Estate in the deceased's house so long she lives in the residence 150 days of the year. The Trustee does not have to pay rent. The Trust shall have the remainder interest and is responsible for a remodel, repairs, upkeep, insurance, and taxes. Where do I report this on the 2014 1041 Trust return? On the 2013 Estate Tax return the prior accountant listed this property on the Sched E with no expenses and on the Deprec Sched with no deprec. Taking no deprec. seems correct, but it seems as if the expenses should be allowed on the return somewhere. And no REG §1.266-1(C)(3) election to capitalize the expenses was taken on the Estate Tax Return in 2013. FYI, the assets were transferred from Estate to Trust in Jan of 2014. Thanks

[cpacwt@yahoo.com]

The expenses of the property are normally the responsibility of the life tenant. You may want to talk to the attorney that created the trust

[Bees Knees]

IRS Pub 559, page 17 says: "In figuring taxable income, an estate is generally allowed the same deductions as an individual." On page 18 it goes on to say: "When figuring the estate's taxable income on Form 1041, you cannot deduct administration expenses allocable to any of the estate's tax-exempt income."

Thus, when deciding whether expenses for the house are deductible on Form 1041, you basically would use the same tax rule as for an individual filing Form 1040. It someone lives in your house rent free, what expenses do you get to deduct? Answer: Interest, property taxes, and casualty losses.

Utilities, house insurance, repairs, etc. would all be non-deductible personal expenses because someone who is not paying taxable income to the owner is using the residence.

Capital expenses, on the other hand, would be accumulated as additions to basis of the house and come into play when the house is eventually sold. So if the estate winds up having to pay tax on the gain from selling the home, any expenses that are capitalized could be used to offset that gain.

[lshuling]

This is what the settlor of the Trust wanted. The Trust has multiple income earning properties and with plenty of income to pay the upkeep. No money is ever distributed to beneficiaries. This basically is the inheritance, the right to live in the house. A few other's are living in rentals, at half rent.

[lshuling]

This sounds more accurate, do you actually have to take the REG §1.266-1(C)(3) election to capitalize the expenses on each year's return? Or do you just keep track of expenses like a homeowner does? On the Trust returns that I have prepared, I take the election, but the prior accountant did not elect anything on the 2013 Estate Tax Return. Also, the prior accountant had this on a Sched E with no expenses. It does not seem like it should be on the return at all. Correct? Thank you so much for your help.

[Bees Knees]

I don't see anything in Reg. §1.266-1 that allows you to capitalize anything other than taxes and carrying charges (interest), and necessary expenditures paid for the development of real property or for improving real property. How do utilities and insurance fall under that category?

[lshuling]

I don't want to capitalize the utilities and insurance, just the remodel. Also, shouldn't I remove the house from a Sched E? And the deprec sched?

[Bees Knees]

Yes. If there is no rental income, there should be no Schedule E or depreciation.

[lshuling]

Thanks, I removed them.

[Roland Slugg]

Although I believe Bees Knees answered the questions that are on your mind, I will answer the question you actually asked:

The Trust shall have the remainder interest and is responsible for a remodel, repairs, upkeep, insurance, and taxes. Where do I report this on the 2014 1041 Trust return?

Report the taxes paid on line 11 of F-1041. None of the other expenses you listed is deductible. You didn't mention interest, but if there is a mortgage on the property, report/deduct the interest paid on line 10 of F-1041 for 2014.

If the house is remodeled or improved, those costs are not deductible, so they are not reportable on the tax return. Such costs should, of course, be added to the property's basis.

On the 2013 Estate Tax return the prior accountant listed this property on ...

I don't believe you mean the "Estate Tax return." From the context of your OP I believe you meant the Income Tax Return for the estate or trust ... F-1041.

[Burke]

I agree with the non-deductibility of the expenses due to the fact that this arrangement is being provided to the Trustee (and possibly eventual heir/beneficiary?) at zero rent which is less than FRV. And I wonder about the "few others who are living in the income-producing properties at half-rent." Are all these people beneficiaries of the Trust? And is the Trust filing Sche E's for those properties?

[lshuling]

I inquired and none of the beneficiaries are taking advantage of the rental properties because there were other requirements tied to them doing so. One more question: The client wants to paper file and since there have been no distributions on the K-1s (all are zero), do I even include them with the return? Thanks

[taxea]

Among other issues, none of the residences where the beneficiaries reside should be on a Sch E because they are not paying FMV rent.

[Burke]

I inquired and none of the beneficiaries are taking advantage of the rental properties because there were other requirements tied to them doing so. One more question: The client wants to paper file and since there have been no distributions on the K-1s (all are zero), do I even include them with the return? Thanks

If there have been no distributions, then there should be nothing on the K-1's to report and you do not include any with the return. I assume the Trust is paying tax on any net taxable income?