Inherited farm, expenses deductible?

[kamckinley]

One of my clients inherited a small farm in 2015. The farm only generates $2,000 of rental income, with approx $500 of expenses. The rent was received before my client's mother passed away and reported on her final 1040. The expenses - insurance and real estate taxes - were paid by my client after his mother passed away. Would you file a Sch E for him this year or deduct the real estate taxes on Sch A and start Sch E next year when he receives the rental income? Thanks!

[ATSMAN]

Requires a form 1041 for the decedent's estate because I am assuming title to the farm has NOT yet passed on to the next of kin or beneficiary. Was there a will? probate?

[kamckinley]

Farm has passed to benes already

Requires a form 1041 for the decedent's estate because I am assuming title to the farm has NOT yet passed on to the next of kin or beneficiary. Was there a will? probate?

I am preparing a 1041 but was not planning on including the farm expenses. The farm had beneficiary deeds so it passed to beneficiaries automatically. The children paid the insurance and real estate taxes out of their own funds, so I was going to start a Schedule E (farm was for pasture rent only) on the beneficiaries 1040 and deduct the insurance and real estate taxes. Is that the correct way to handle? Thank you.

[ATSMAN]

I am preparing a 1041 but was not planning on including the farm expenses. The farm had beneficiary deeds so it passed to beneficiaries automatically. The children paid the insurance and real estate taxes out of their own funds, so I was going to start a Schedule E (farm was for pasture rent only) on the beneficiaries 1040 and deduct the insurance and real estate taxes. Is that the correct way to handle? Thank you.

I have a client who rents out 99% their land to other farmers for rent only. He just has a few hundred yards for a "kitchen garden"! We have been doing Sch F all along and the rent is reported on line 8. Taxes are deducted as usual.

So I think you can still continue to do sch F.

[kamckinley]

The previous accountant used Schedule E on the mother's return to report the rent and taxes. I admit I don't have very many clients with farms or land for rent, so I'm not sure when to use Sch F vs. E.

However, my main concern was the children deducting the expenses (on either F or E) when they didn't receive the income. Any problems with that that anyone can see? Would the expenses be considered personal for 2015 since they didn't receive the income or does it matter?

Thanks again.

[Lion]

I've been using Schedule E for my cash rent of my IL farm and Form 4835 for the sharecropper farming activity.

I don't have any research to say that's right, because I did what my cousins were doing from the time we all inherited undivided interests in our grandfather's entire farm to later when we divided the land with one parcel in my name only. I continued what they were doing with their much larger farms (had inherited from both sides of their families and live in IL) and how they/we reported when we all owned the undivided farm both for consistency and for reporting purposes when we sell, because all our land is contiguous and we'll most likely offer it up together.

[Burke]

The previous accountant used Schedule E on the mother's return to report the rent and taxes. I admit I don't have very many clients with farms or land for rent, so I'm not sure when to use Sch F vs. E.

However, my main concern was the children deducting the expenses (on either F or E) when they didn't receive the income. Any problems with that that anyone can see? Would the expenses be considered personal for 2015 since they didn't receive the income or does it matter? Thanks again.

I don't see what other alternative you have. Mother got the rent so that's on her 1040. They paid the expenses after they inherited the farm. Look at it this way, they inherited everything else too (I am assuming) so that means the cash rent she got for the farm. You can't save this year's expenses for next year. I am also assuming it was and is continuing to be a rental situation. If they ceased renting it out when she died, then the expenses would be personal, non-deductible, except for the real estate taxes.

[Roland Slugg]

When farm property is rented out, the income and expenses are supposed to be reported on F-4835, not directly on Schedule E. The net income or loss ends up on Schedule E anyway, on Part V, Line 40, but it should start on F-4835.

[Lion]

Thank you, Roland. I'm going to check with my cousins to make sure I don't throw a monkey wrench into any family matters. My return goes on extension anyway while I prepare my paying clients. Maybe I can get my one and only farm reported correctly this year.

[ATSMAN]

I agree with Roland but if for years Sch E was used (without any audits) and all of a sudden you switch to 4835 it may raise a flag??

From a practical perspective it may make sense to not rock the boat!

[Lion]

I do tend to lean to consistency in reporting....

[TaxmannEA]

If the farm is rented for cash rent, then you use Sch.E. If it's a share-crop rent arrangement, use 4835. Sch. F is used for active farmers operating the farm themselves.