Bring forward expenses of improvement from post death trust

[Treasur2]

TP passed 01/10/18.

TP had a living trust. (don't ya love these things, I've learned to......not). Everything worked fine as intended legally.

A personal residence is in trust . 4 children are beneficiaries. All get along fine. One is a carpenter. He has been living free in the house, for about a year since passing doing minor repairs, upgrades since dod above as agreed per all siblings/trustee/beneficiaries. Now the house has been sold. The house has been treated as a capital asset in my opinion. Not rental. So most, not all, costs of improvement increase the basis of the house a tiny bit (tell me if you disagree and why). No depreciation to take.

Learned yesterday that IRA of TP had named beneficiary as the trust. One of the beneficiaries is my client. He had been telling me for 9 months "IRA is only money we have received, no money from the trust has been disbursed". He has not been lying of course just misinformed, misunderstands complexities and cash flows. Point is I was thinking very low if not zero income for trust so doesn't need to bring up possible tax liability. Wasn't even sure 1041 was necessary or beneficial. Well, that's gone now. It certainly is. Living trust directions list no requirement of post-death estate paying out income on any timeline that I can see. Plus K-1s I believe and they will be late unless I file extension ...right?

So brokerage correctly liquidated IRA to trust. Reported 1099-R as trust name and registration (that was a surprise to me....until I thought it through). Now first-year trust 1041 has material tax liability primarily from IRA distribution with limited expenses for 1st year of trust against it 2018. The trustee who is also one of four beneficiaries has no idea that a tax liability is about to be communicated from yours truly.

Question: Is there any stratagy\technique\rule I am unaware of that would allow bringing forward this capital improvement and/or some maintenance expenses that are solely for the primary residence that I anticipate using for 2nd of 2-year existence of trust for 2019 1041. Vs. using them against the capital gain of house value at sale. Hope this makes sense.

[Burke]

Are you saying that trust income from IRA was received in 2018? Did the brokerage or custodian withhold tax? And nothing was distributed to beneficiaries in 2018, or by March 6 of 2019? If it was, taxable income goes first, so IRA would qualify and would be part of DNI. Income passes to benes to the extent distributed. Since estate/trust year would end 12/31/18 due to date of death, and trust/estate can elect to be treated as one entity, Section 663 could be utilized to cover distribution if it was made by 3/6/19. Was house actually re-titled into trust? When was it sold? Is there a gain/loss?

[Treasur2]

Yes, trust income from IRA was received in 2018. Yes, brokerage withheld tax (10%). No, money was distributed to beneficiaries in 2018. Yes, the house was retitled into trust. Yes, it was sold (Feb 2019). There is a gain.

[Burke]

If brokerage withheld tax under estate EIN, you should show that on Form 1041 as you will have to report the income, and apply to have the tax refunded to the estate. If funds were distributed to benes in 2018, then the income flows through to THEM via DNI and the K-1's. They will report the part attributable to IRA as taxable income plus any other taxable income the estate may have had (to the extent of distributions) on their 2018 tax returns. Let's hope they have not filed yet. If so, amended returns are in order for the benes. The capital gain (if any) on the house will be on the 2019 Form 1041. It will flow through to benes for next year's filings.

[Burke]

On the sale of the house, since it was sold within a year, and there were capital improvements, is there really a gain after deducting all expenses of sale? Need to review. FMV at DOD less cap improvements, less expenses of sale = gain/loss. The realtor's commission and other closing costs usually ensures no gain.

[Treasur2]

I know your right on passing income on IRA distribution to beneficiaries. I'm just not sure why. Can you point me to an educational resource? I'd like to understand this completely. Trying to educate myself correctly. appreciate your guidance.

[Burke]

I know your right on passing income on IRA distribution to beneficiaries. I'm just not sure why. Can you point me to an educational resource?

First start with the instructions for Form 1041 provided by the IRS. Especially paragraph relating to Form 1041 - Line 8, on page 21 re: reporting IRA income; and Line 10 instructions for Page 2 of Form 1041 in re: computing DNI, on pages 28 and 29. Are you using software to prepare this return? It will handle all this automatically.