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Distributions from complex trust with only rental loss carryforwards

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The only activity in a client's complex trust is a rental property. There have only been rental loss carryforwards reported each year.

In 2019 both beneficiaries took distributions totaling $5K. The only reason they are able to take distributions is because of depreciation deductions through the years. In 2019 the trust is reporting $5K rental loss, $10K depreciation and, with the current year $5K rental loss, the total loss carryforward is $35K.

My question is how should the K-1 report the distributions? Shouldn't the K-1 report $2,500 to each beneficiary in box 9 as depreciation deduction and the $10K depreciation on Sch E be reduced to $5K and the loss carryforward reduced to $30K?

Or is it more complicated than what I am thinking?

Thanks for your help.


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So are both of these numbers shown on the K-1 and result in no tax impact?

Is this because there have always been rental loss carryforwards and because a distribution was able to be made only because depreciation isn't a cash impact?

So the distribution isn't considered from principal?


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16 hours ago, Abby Normal said:

the rental shows a 5k profit

I didn't catch that.

In this case, the 100% of depreciations goes to beneficiaries since 100% of the TIA was distributed to them per the reg.

Rev. Rul. 74-530, 1974-2 CB 188 confirms that they are allowed depreciation in excess of their K-1 reported income.

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