1041 Trust

[peggysioux]

Taxpayer’s mother had a revocable trust and passed away in 2019. No estate/trust income in 2019. Personal residence with mortgage was in trust. Attorney obtained an EIN for trust in January of 2020 and attorney had taxpayer obtain a loan under trust’s EIN in January of 2020. Loan was only in existence for two months (high interest loan) and then taxpayer (trustee and beneficiary of trust) refi’d in taxpayer’s name to buy brother out. Taxpayer made the payments from her personal funds on the high-interest loan for those two months (interest and points over $11,000). Would the taxpayer be considered an equitable owner being she was a beneficiary and mother had passed; and therefore, able to claim the interest on her individual tax return? I found the following in the 1041 instructions:

Qualified residence interest.
Interest paid or incurred by an estate or trust on indebtedness secured by a qualified residence of a beneficiary of an estate or trust is treated as qualified residence interest if the residence would be a qualified residence (that is, the principal residence or the secondary residence selected by the beneficiary) if owned by the beneficiary. The beneficiary must have a present interest in the estate or trust or an interest in the residuary of the estate or trust. See Pub. 936, Home Mortgage Interest Deduction, for an explanation of the general rules for deducting home mortgage interest.

Peggy Sioux

[Burke]

I have never had this particular circumstance before, but it looks to me like it fits all the rules for the trust to deduct the interest as qualified property. And Pub 936, page 2 states she could deduct the interest because she has an ownership interest in the property. So it looks like it could be either. Since she paid it personally, the other bene should have no objections to it.

[peggysioux]

I have never had this particular circumstance before, but it looks to me like it fits all the rules for the trust to deduct the interest as qualified property. And Pub 936, page 2 states she could deduct the interest because she has an ownership interest in the property. So it looks like it could be either. Since she paid it personally, the other bene should have no objections to it.

So if taxpayer choses to deduct on individual tax return rather than on trust return, is there additional information that is required on the individual tax return being the 1098 is in Trust ID #, rather than taxpayers ID #?

Peggy Sioux

[Burke]

Not when you initially file her return. If she gets a letter from them because it doesn't match, I would explain then. She paid it from her personal funds, not the trust's, and she is a beneficial owner of the property. Are there other assets in the Trust? Is it going to be maintained? Or liquidated? No income received by Trust, no 1041 return necessary.

[Lion]

Enter it where you enter mortgage interest for which no Form 1098 was received.

[peggysioux]

Not when you initially file her return. If she gets a letter from them because it doesn't match, I would explain then. She paid it from her personal funds, not the trust's, and she is a beneficial owner of the property. Are there other assets in the Trust? Is it going to be maintained? Or liquidated? No income received by Trust, no 1041 return necessary.

Trust received less than $100 in interest income (no other assets) so a trust return will have to be filed and there were attorney fees paid in 2020. 2020 1041 will be first and final 1041 return. I was unsure whether to carry the mortgage interest to the 1041 (which would have to be split between the two beneficiaries even though taxpayer paid mortgage payments from her personal funds??) or to carry to taxpayer's individual income tax return. Taxpayer purchased brother's share of home. Attorney had taxpayer obtain a mortgage loan in name of trust to cover original mortgage and payoff amount for brother; however, only loan that taxpayer could get was a commercial loan at 9% interest (yikes). She paid the brother off, transferred asset into her name, and refi'd out of commercial loan as quickly as possible. With all that said; would it be best to carry the mortgage interest to individual tax return and file a 1041 for the very small amount of interest income and deductible attorney fees?

[TAXNJ]

So if taxpayer choses to deduct on individual tax return rather than on trust return, is there additional information that is required on the individual tax return being the 1098 is in Trust ID #, rather than taxpayers ID #?

Peggy Sioux

Consider attaching to the return an explanation referencing the interest deduction.

[Burke]

.....would it be best to carry the mortgage interest to individual tax return and file a 1041 for the very small amount of interest income and deductible attorney fees?

That's what I would do. You get a $100 exemption which negates the interest, and since it is a final return, the attorney's fees carry to bene's K-1',s @ 50/50. Also, your fees are deductible for the 1041 prep. And maybe a deed transfer fee?

[peggysioux]

That's what I would do. You get a $100 exemption which negates the interest, and since it is a final return, the attorney's fees carry to bene's K-1',s @ 50/50. Also, your fees are deductible for the 1041 prep. And maybe a deed transfer fee?

Thanks Burke. Regarding my fees; deduction for my fees can be taken on 2020 1041 even though not paid until 2021 due to being final return?

Peggy Sioux

[Burke]

When was date of death? Can you elect 645 and a fiscal year? If no income in first fiscal year, no return needed. Income and expenses would be in 2nd fiscal year.....

[peggysioux]

When was date of death? Can you elect 645 and a fiscal year? If no income in first fiscal year, no return needed. Income and expenses would be in 2nd fiscal year.....

Date of death was 5/12/19. Attorney fees paid in January of 2020. Tax prep fees will be paid in April 2021. Even if I make the 645 election, and chose a fiscal year, I don't see how the I can include the tax return fees. Please let me know if I am missing something that would allow the 645 election and include the tax prep fees.

If I elected a short fiscal year for first year of 5/13/19 through 12/31/19 so that the attorney fees could be included in 2nd fiscal year, I don't meet the 65 day rule for the tax prep fees being paid in April of 2021.

Peggy Sioux

[Burke]

Date of death was 5/12/19. Attorney fees paid in January of 2020. Tax prep fees will be paid in April 2021. Even if I make the 645 election, and chose a fiscal year, I don't see how the I can include the tax return fees. Please let me know if I am missing something that would allow the 645 election and include the tax prep fees.
If I elected a short fiscal year for first year of 5/13/19 through 12/31/19 so that the attorney fees could be included in 2nd fiscal year, I don't meet the 65 day rule for the tax prep fees being paid in April of 2021.
Peggy Sioux

As far as I know, Section 663(b) regarding 65-day rule only applies to distributions to beneficiaries, calculated via DNI, not expenses. I always bill my clients early in these cases so they get paid before the end of the estate/trust's last tax year. They can be accrued. Were there distributions of cash in 2020? Was a return filed in 2019? When you file the 2020 return, the attorney's fees don't help you much since income was so minor. I think you will have an NOL however, from what you say, and you can waive the carryback. Final year of estate/trust ends when funds are distributed. The tax prep fees will be in 2021, and can be deducted by the trust/estate, passing thru to beneficiaries who can deduct them on their tax returns, due to new regs from IRS (as an above-the-line deduction I believe). See ruling effective 10/19/20 for misc deductions by trust. Doc 2020-21162. Haven't had one this year yet.