Estate/Trust where do you input mortgage interest deduction from K-1, box 11(B) on beneficiary's 1040?

[Niebo_26]

Excess Deductions on Termination - Non-Miscellaneous Itemized Deductions for interest portion. Prior to 2018 they were claimed by beneficiary as a "2% Miscellaneous Itemized Deduction."

[sjrcpa]

What was mortgaged?

It might be Investment Interest expense.

It might be nondeductible.

[Niebo_26]

Thank you for your response.  The CPA who prepared the Form 1041 and K-1 said the interest is for a reverse mortgage loan that was paid on a residence including property taxes.

[sjrcpa]

Does the beneficiary live in that house?

Need more details about the house in the hands of the Trust.

Was it sold? 

Did Trust inherit it form someone?

[Niebo_26]

No, the beneficiary does not live in the house.  The parents died , the property was sold, and the proceeds was left to the beneficiaries.  

[sjrcpa]

You can probably make an argument that the interest is investment interest.

The real estate tax portion should have been deducted on the 1041.

[Niebo_26]

Thank you for your comments.  After doing extensive research on the change in treatment of Excess Deductions on termination, the regulations follow up of Notice 2018-61, TD 9918 and other publications, points in another directions.  It was stated that this portion are the Excess Deductions on Form 1041 would have been itemized deductions, if paid by an individual, including taxes and interest.  These expenses should be entered in their proper location on the Schedule A and broken down into individual categories claiming them as either an adjustment to income, a non-miscellaneous itemized deduction on Schedule A or as a miscellaneous itemized deduction.  Prior to 2018 these Excess Deductions were claimed by the beneficiary as a "2% Miscellaneous Itemized Deduction." 

This was my last out reach and I still don't feel I can make an argument that I am comfortable reporting.

Thank you and I appreciate your time.

[BobKamman]

Reverse mortgage has to be paid off when the homeowner dies.  When did that happen?  You are correct that these should be deducted as interest -- there's a line for that on the 1041.  But I don't think they can be carried over, year to year.  If it was paid in 2018, it could only be used in 2018.  

[sjrcpa]

And the beneficiary can't deduct it as mortgage interest because it does not meet the requirements for mortgage interest on a first or second home for the beneficiary, secured, etc.

[sjrcpa]

If it was treated as investment interest on the 1041, it is a grey area as whether it can be carried out to beneficiary as investment interest. I've researched it a couple times but not in the last few years. I seem to recall this is because the rules on excess deductions on termination were written before there was such a thing as investment interest carryover. So investment interest was not included in the list of what constitutes excess deductions on termination.

And I guess tax software is presenting excess deductions in a new way. I'm working on a final Trust 1041 whose only deductions - state taxes- are greater than the income. The K-1 11B has a statement that this is state tax. Don't think I've seen that before.

[Niebo_26]

Hello Bob,

The reverse mortgage was paid off in 2024 after the homeowner died.  A lot of research mention that the deduction should be deducted by the beneficiary as interest on "A LINE" on Schedule A.  I can only assume it was reported to the fiduciary on Form 1098, but can't confirm.  My client does not have a copy of the 1041, so I don't know exactly where the interest was reported on the 1041.  There is nothing to carryover.  The deduction was allocated to 6 siblings, my client being one of them.  I was told the interest could be reported on Schedule A, Line 16 as other miscellaneous deductions, but could not find anything to substantiate that position.

Thank you for your response.

[Niebo_26]

The CPA mentioned I could report the taxes portion of Excess Deduction along with the property taxes on Sch A with the other taxes.  It's under $100, so I didn't have a problem with that.  He originally advised to report it how it was reported before the changes in 2018.  The Lacerte software did not calculate the deduction because this is the pre 2018 line for 2% miscellaneous deductions that is no longer deductible for tax years 2018-2025.   I called the CPA back but have not received a call back.

[Niebo_26]

I agree....  I have looked at this from all angles and I'm exhausted trying to find answers to support a reasonable position.

[Niebo_26]

I'm still trying to interpret the language in TD9918.  This is really bizarre....  There is no clear answer from the IRS as to how they want the deductions reported.

Thanks