Trust Expense

[JJStephens]

I don't do many trusts (which is probably a good thing) so I need to borrow some of the wisdom of some you trust gurus.

In 2014 a long time client became administrator of a complex, grantor trust (mom's estate) that owns a small cottage and also has some residual mineral rights on another property sold long ago. I recorded the royalties on the extracted oil & gas and the taxes paid thereon. I did not include repair and maintenance costs on the cottage (used exclusively by family members for brief get-aways). My rationale was that costs can be deducted only if they are related to the source of income.

One of the kids--an attorney--is questioning my handling of the cottage costs (and now, so am I). Did I do the right thing or should those costs have been deducted on the 1041 (if so, where)? One way or the other, the attorney is asking for specific cites to back up whatever I do.

Help!!!

[Abby Normal]

I don't know the answer but this article might get your research started. Good luck and keep us posted!

[DANRVAN]

 

You might point out to the client that per reg 1.641(b) the deductions of an estate are generally the same as an individual.

I would also refer the client to reg 1.212-1 that explains when nonbusiness expenses are deductible:

(a) An expense may be deducted under section 212 only if—

(1) It has been paid or incurred by the taxpayer during the taxable year (i) for the production or collection of income which, if and when realized, will be required to be included in income for Federal income tax purposes, or (ii) for the management, conservation, or maintenance of property held for the production of such income, or (iii) in connection with the determination, collection, or refund of any tax....

(h) Ordinary and necessary expenses paid or incurred in connection with the management, conservation, or maintenance of property held for use as a residence by the taxpayer are not deductible. However, ordinary and necessary expenses paid or incurred in connection with the management, conservation, or maintenance of property held by the taxpayer as rental property are deductible even though such property was formerly held by the taxpayer for use as a home.

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While the Knight case referred to by jmdaviscpa centers on whether an investment expense is subjet to the 2% rule, it also places the estate in the "hypothetical situation" of an individual in determining how the expense is treated by the estate.

If in your client's situation the house was treated as an investment (for sell instead of for personal use) the exenses would be added to the basis.

Hope this helps.

 

[DANRVAN]

Bottom line, personal use; no deduction.

[JJStephens]

Thanks all. Very, very helpful.

So I guess it turns out I did the right thing ... even if my rationale for why was a bit vague!