Form 1041 preparation

[DAP]

I am looking to prepare the 1041 for a residential house in trust wit 2 daughters as beneficiaries.

Client got ID # for trust return as they were going to sell the house out of the Trust. Then one of the 2 beneficiaries changed their mind about selling and bought her sisters half from the irrevocable trust.

That day the proceeds were then transferred from escrow to a trust bank account. House titled to one sister received the cash from the trust bank account. The only asset in the Trust was the home and no income on the house while in trust.

Best way to report a non taxable transaction and file final return. Just complete schedule D with in and out?

Thank you in advance.

[IRonMaN]

You don't say how the trust came into being.  If the parent recently died and the house went into the trust upon death, then it sounds like the trust sold half the house to one beneficiary.  If the price was equal to or less than market value, you have a sale on schedule D with sales price equal to basis.

[BobKamman]

Trick question.  You can't call it a nontaxable transaction.  The trust sold half the property, and that should be reported on a Form 1041 (at least, if there was a gain; we don't know the basis.)  The escrow agent has probably reported it using the trust's EIN.  Since it's a final return, the gain flows through to both beneficiaries.  

[George4Tacks]

@BobKamman could it be a loss? Sell at step up basis for that value, but escrow expenses? 

[George4Tacks]

@BobKamman Could there be a loss? Sell at basis, but expenses of sale? Maybe the market value dropped since date of death.

[BobKamman]

@George4Tacks It might be a loss, but I would think twice about claiming it as an arm's-length transaction, with profit motive.  

[DAP]

Yes the mother passed away and an appraisal was done date of death of $575,000.00 and sister paid the trust for half so she could solely own home. No profit as used the appraisal for value. so sales price did equal basis

[DAP]

Thank you. There was no gain as the purchase of the 50% ownership was based on value at date of death so sale price equaled basis

[DAP]

expense of sale was less than $200.00

[sjrcpa]

How is it a final return if the trust owns 1/2 and the purchasing sister owns the other half?

In addition to the sale not having a profit motive as pointed out by Bob, there may be related party rules disallowing a loss for tax purposes.

[DAP]

Hello

Thank you in advance for all your info. Let me try to re summarize

1) Parent dies and leave primary residence titled in trust 50% to each daughter A and B.

2) Daughter A wants to sell the house asap yet daughter B wants to keep ( sentimental)

3) They agree that Daughter B that wants the house will pay the trust 50% of the calculated  basis that was appraised at death. That money will be for Daughter A and put in the Trust bank account which was setup under the Trust EIN..

4)  Escrow officer facilitates the complete transaction on the same day. Sister A withdraws the cash that was paid to the trust for her 50% ownership in the home and Sister B is given title to home of which 50% she inherited and 50% that she bought from the trust. 

5)  My real question was what part of all these transactions needs to be reported on D ? There is no loss or gain to report as all expenses were paid by Sister A and B to the escrow company.

[sjrcpa]

I understand now why it is final.

Yes the sale of 50% gets reported on Schedule D.

[BobKamman]

it's always sad when people can't give up real estate because of emotional connections. I remind them that the memories are in their head, not in the house.  But it's her money.  Maybe she has no one to whom to leave it.  

The question is, why are you filing a Form 1041?  The trust has no income.  Did the escrow officer send a 1099-S to IRS, and you're afraid of a matching project?  I doubt IRS is doing that for trusts these days, and there's no penalty for a late return, but caution might be understandable.  But I would find out first, whether the form was filed and if so, what it showed. 

Kalaallit Nunaannut kiffaanngissuseq

[BobKamman]

@sjrcpa I understood from the first post why it was final.

"That day the proceeds were then transferred from escrow to a trust bank account. House titled to one sister received the cash from the trust bank account. The only asset in the Trust was the home and no income on the house while in trust."

Kalaallit Nunaannut kiffaanngissuseq

[DAP]

There was no income yet I was concerned about the cash transaction to sell the 50% to sister. I do have a substitute 1099S for this transaction yet not sure if they sent it in or just gave as proof of transaction 

[IRonMaN · Accepted solution]

It's a pretty good assumption that it was filed.  Just prepare the 1041 with a schedule D and you can safely move on to your next return. 😀