Trust Tax Return Question

[Ephesians3-14]

My client passed away in September. The only asset in her trust was a 4-flat building. 

1. The building sold on Dec 27, 2023 for $725K, so I'm using $725K as the basis as well. Can I depreciate the property for the period Sept - Dec 2023? There are tenants in the building.
2. Because of closing costs, there will be a loss of approx. $50K. Would this be a Sect 1250 loss (ordinary)?
3. No estate tax return will be filed because this was her only asset when she died. 

All proceeds will be distributed from the trust bank accounts in early Feb 2024.

Any input would be appreciated.

[sjrcpa]

1. No. It was acquired by the trust and sold in the same year.

2. 1231 Loss.

Consider making a 645 election to treat the trust as part of the estate. Then you can do a first and final 1041 for the period from date of death through termination in February 2024. Otherwise trusts have to use a calendar year and client is looking at two trust returns.

[Ephesians3-14]

Great -thanks for the information. Regarding depreciation, when I enter the cost basis on the 4562 worksheet it does calculate deprecation for the short 3 month period. I also entered the Dec sale date (and proceeds), so the software "knows" I sold it within the same year. So, am I not allowed to claim depreciation? I know that it really wont' matter any because it's a Sect 1231 loss.

Could I just apply for an FEIN for an estate (even though there really isn't an estate) and then file the 1041 using the estate FEIN and make the Section 645 election on the 1041? Would that scenario allow me to file a 1041 on a FY basis?

[sjrcpa]

Could I just apply for an FEIN for an estate (even though there really isn't an estate) and then file the 1041 using the estate FEIN and make the Section 645 election on the 1041? Yes. Would that scenario allow me to file a 1041 on a FY basis? Yes

[Ephesians3-14]

If I decided to file on a calendar year basis and the proceeds from the sale of the building were distributed to the bene's in early January 2024...does that distribution get thrown back into 2023 under the 65-day rule?

Would love to file a first/final 1041 for 2023, so if the answer to the question above is "yes", I am not expecting much interest income on the proceeds in the trust bank account (maybe under $50) in 2024, so I can probably file a first/final 1041 for the 2023 tax year and then ignore the $50 because it would be under the 1041 exemption level in 2024, yes?

[sjrcpa · Accepted solution]

Regarding depreciation, when I enter the cost basis on the 4562 worksheet it does calculate deprecation for the short 3 month period. I also entered the Dec sale date (and proceeds), so the software "knows" I sold it within the same year. So, am I not allowed to claim depreciation?

Maybe, because the inherited property is deemed to be held long-term, the acquired and sold in same year rule doesn't apply. Or maybe the software is wrong. I don't know.

[sjrcpa]

If I decided to file on a calendar year basis and the proceeds from the sale of the building were distributed to the bene's in early January 2024...does that distribution get thrown back into 2023 under the 65-day rule?

If you make the 663(b) election, yes.

$700,000 is only earning $50 over 2 months? 

[Ephesians3-14]

Yes, I'll actually take the $$$ out in the next couple of weeks. Interest in that account is only .35%.

What's the max I can earn in the trust in 2024 without having to worry about filing a final return in 2023? Because I'd like to just file a first/final in 2023.

[sjrcpa]

See the 1041 instructions for the filing requirement.

[GiantFan]

You need to read section 645 and the regulations for the procedure when there is no probate estate.  In that case the trust gets and EIN and makes the election.   You do need to complete Form 8855 and the trustee has to sign and date in two places and submit the signed form with the return for the election to be valid.  

[sjrcpa]

Does it really hinge on whether there is a probate estate? I don't think so but could be wrong.

[GiantFan]

No it does not hinge on whether or not there is a probate estate.  However the poster talked about getting a tax id# for an estate even though there was no estate, just a qualified living trust.  I was trying to point out that the procedure is different depending if there a probate estate or not.  The regulations outline the procedure pretty clearly and the original poster should read them if they plan to make the election.