TRUST

[TAXMAN]

TP's personal house put in Irrevocable Trust. TP decd 2 years ago. Trustee rented house during 2 years showing loss on trust return(not ded by trust or trustee). Trustee was to get house. Trustee took possession of house(all deeds redone). Trust died. Trustee gave house to mother. Mother gets new deeds in her name and promptly rents house out.

Question: what happens to the suppended loss by the trust?

any effect on trustee(tax wise) in receiving house?

Basis to mother?

I think a gift tax return is in order equal to the FMV of the house at time of gift?

Can some advise?

neither trustee or mother used house as a personal residence.

[OldJack]

See form 1041 instructions on excess deductions upon termination of the Trust. In most cases such deduction may be passed onto beneficiaries by way of the final 1041-K1.

Basis to mother as a gift is the basis of the beneficiary/trustee basis at the time of the gift. Not FMV at time of gift.

A gift tax return is required (assuming basis is more than normal exception) by the giver of the property.

[Randall]

Did Trust become irrevocable at death of TP? Then wouldn't Trust get stepped up basis? Or was irrevocable trust created for TP as primary beneficiary (from rent) while still living? Are you saying Trustee is residual beneficiary and therefore received the house from Trust as a result of death of TP (primary beneficiary). Then would Trustee receive stepped up basis? Then Trustee's basis would pass to giftee (mother). Not sure about all this, just putting out some thoughts.

[TAXMAN]

The way I understand what happened was TP got ill, did not want NH to get property put it in a nonrevocable trust b4 death. Died 2 days after. Trustee was residual owner. Trustee rented it with all income and deductions remaining in trust for 2 years. Then closed trust and took possession. 2 months later she gave house to mother. Just not sure proper way to get all this stuff out. Can trustee make use of suppended losses and determining basis for mom to rent and gift side. appreciate all angles to use.

[Randall]

See what the trust document says. But sometimes, these things are done inappropriately, cutting corners and are not very good documents. Trusts are supposed to be created for a purpose with a finite life. The Trust document should say for what the purpose of the assets, income from assets, who beneficiaries are, etc. Sounds like some quick fly by night. See if an attorney was involved with the trust creation.

[OldJack]

I assume the title of the property was in the name of the trust at date of death, otherwise you don't have a trust problem. Trust therefore gets step-up basis to fair market value as of date of death. Trust (not the trustee) then rents property, takes depreciation, pays expenses, and receives income that it either pays income tax on 1041 or passes/distributes the taxable income/loss amount to beneficiaries for taxation (not to confuse with cash distribution) EACH YEAR. The trust then distributes all assets which would be the property and any cash and shows any unused deductions/loss FOR THE FINAL YEAR on the final trust 1041-k1 for the beneficiaries.

Its hard to understand a loss when the only cash the trust had was from rent income, unless the loss was a result of something like depreciation.

[TAXMAN]

Hopefully will find out more this weekend.

[TAXMAN]

Real estate was put in irrevocable trust(tp still living in house)TP owned this house by himself, with beneficary and trustee being daughter-in-law in 2006. TP died 2 months later(2006). Trust/trustee sat on house untill 2009 when it bacame a rental. Basis was stepped up in 2006. From 2009 to 2012 rental was always a loss(due to dep). No other activity in trust. All losses were suppended per form 8582. Now in 2013 trustee disolves trust and passes deed to herself. Upon getting clean deeds she then gifts property to mother with a new set of deeds.

Question#1: what happens to suppended losses that were never passed out?

Question #2: basis to mom would be basis from daughter?

Gleened informaion from the trust document and 1041 & k-1's filed 2006 to 2012.

Best I have. What do you think?

[kcjenkins]

1. Suspended loss is gone.

2. Property Received as a Gift

To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it.

FMV Less Than Donor's Adjusted Basis

If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier).

If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property.

Example.

You received an acre of land as a gift. At the time of the gift, the land had an FMV of $8,000. The donor's adjusted basis was $10,000. After you received the land, no events occurred to increase or decrease your basis. If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss.

If the sales price is between $8,000 and $10,000, you have neither gain nor loss. For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain.

Business property. If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property.

FMV Equal to or More Than Donor's Adjusted Basis

If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift.

Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property.

Gift received after 1976. If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. Figure the increase by multiplying the gift tax paid by a fraction. The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift.

The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes.

Example.

In 2010, you received a gift of property from your mother that had an FMV of $50,000. Her adjusted basis was $20,000. The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). She paid a gift tax of $9,000. Your basis, $27,290, is figured as follows:

Fair market value $50,000
Minus: Adjusted basis 20,000
Net increase in value $30,000
Gift tax paid $9,000
Multiplied by ($30,000 ÷ $37,000) .81
Gift tax due to net increase in value $7,290
Adjusted basis of property to your mother 20,000
Your basis in the property $27,290