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Where do I start? First Trust Return


Tax Prep by Deb

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I may be in over my head and I know I still need to do some reading, but I have a client who is a Trustee of a Revocable Trust.  The person who had the Revocable Trust past away back in 2003.  My client did not even know this trust existed until last year at which time a tax id number was assigned the trust and she began liquidating the assets.  The only asset was the deceased person's home.  From the time of death till when my client took over a family member from the other Trustee was living there and paying nothing.

My client did proceed to get an appraisal going back to time of death.  She put it on the market and sold the home For 486,000.  The appraised value at time of death was $415,000.  In addition there was $34,000 in selling expense, and a large amount of back property taxes that equals $32,536.00, and I still need to see the checks that were written, but there was some fixing up costs ect... that I feel will bring this sale to almost no gain.

However, even if I bring the gain down to zero, It is still charging taxes.  Should this be so?  I have used form 8949 to report the sales and then schedule A to report the property taxes that were paid and them using line 15a to report the extra expenses.

Not at all sure if I'm doing this right and would love some input.

Also how do I know which box to select in section A?

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Definitely read the trust doc.  The trust likely became irrevocable at death and should have filed 1041 each year, but since there was no income or expenses all those years one wasn't necessary.  (Expect IRS to come back when the current 1041 is filed and demand the past ones--a simple letter should clear it up.)

What you are finding on the tax return makes no sense.  If you brought the gain to zero, then line 9 (total income) should be zero.  The tax on nothing is nothing.  Further, if you marked the box for final return, all income and expenses get passed through to the beneficiaries and the trust pays no tax.  Perhaps you haven't added the beneficiary info yet so the program doesn't know what to do with the income distribution deduction?

Realtor fees and closing costs get added to basis.  (They can't be treated as administrative expenses because a "related party" was living in the home.) Fix up costs are also added to basis. Your fee, by the way, is deductible on line 14, even if it hasn't been paid yet or goes into the next fiscal year.  I don't have the cite with me, but politicians (many of whom are attorneys) decided unpaid attorney fees could be deducted and for some reason included accountants in on the perk.

Property taxes usually go on line 11.  However, if they were paid on behalf of a beneficiary who was using the home, you can't deduct them.  They instead get taken from that person's share of the distribution.  You really need to read the trust doc to determine what to do. 

Don't be afraid of this.  It's a very straightforward 1041--one transaction and some expenses.  The 1041 instructions are all you need to read.

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I agree with Lion and Sara.

You need to read the trust document.  And Sara's explanation was right on point.  I would just add that I have seen trusts wherein they allow a beneficiary (non-starter child or a disabled child or other disabled relative) to remain in the house without paying for any housing expense.  But these trusts are usually funded in some manner to cover those costs.  And accordingly, since the funding is usually in interest bearing or dividend producing investments, a continuing reporting on 1041 is required.  The most curious thing I find about the present case is if there was that much back tax owed, how come there had not been a tax foreclosure sale?

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I agree on that question, but maybe this will explain something else.  When the person who started the trust died, there were two beneficiaries named.  The other beneficiary stayed in the house until her death, and I am assuming paid the property taxes as they came in, (I do not believe at this point the death or change of ownership was recorded at the tax office)and I believe it was under the previous owner's assessment, which meant the taxes were being paid but at a much lower rate.  When the house went up on the market and sold, somehow this triggered a re-assessment going back to the death of the other beneficiary sometime in 2009.  When she passed away apperantly one of her kids begin living there.  So I honestly think the back taxes were the result of a re-assessment, not necessarily from not getting paid.

It took my client a long time to finally get a hold of the trust documents due to family conflicts and the heirs to the other beneficiary not cooperating.

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49 minutes ago, Tax Prep by Deb said:

It took my client a long time to finally get a hold of the trust documents due to family conflicts and the heirs to the other beneficiary not cooperating.

Sigh.  It no longer surprises me, but it still always dismays me when heirs fight and bicker and get recalcitrant, obstreperous, and uncooperative.  It makes me want to sit them down and read them the riot act about being grateful for getting *anything* rather than greedy and unhappy that they didn't get more.  It also underscores for all of us the need to let everyone know what the general plan of distribution is, and to have copies in multiple places of any document so one jackass can't mess up the lives of many people just by being a jerk.

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