Trust Return Distribution in Kind

[Mel7777]

Hello!   I have a client who died 10/31/2023 who had a house and two investment accounts in a revocable trust.  There have been several legal issues so the first return has not yet been filed.  When the executor is ready to file...

1. What are some considerations to consider to select the reporting year, whether to elect the first year as a short filing period, 10/31-12/31/2023 or to use a fiscal year, 10/31/2023-10/30/2024?  The house was distributed in 2024.

2.  How do we represent the distribution of the home on the K-1 given that it is a distribution of principal? with the change in FMV as a gain (loss) based on the difference of the FMV on the date of distribution and the date of death.

3.  The house was actually in the original trust to go to three people evenly.  One person did not want it so the other two people paid the third person out in cash 7 months after date of death. Is there any representation necessary on the tax return? Should a K-1 go to the person who received the cash as a distribution of principal and gain/loss if there was any?

Thank you!

[sjrcpa]

Trusts can only have Calendar Years.

But if you make a 645 election to treat the estate and trust as one, then the estate can have a fiscal year. This election is only good for 2 years from date of death.

When distributing property you can make an election to recognize gain at the trust/estate level but I have rarely seen it done.

Show as other distributions and it will carry out income earned on Beneficiary K-1s

[Mel7777]

SJRCPA -

Thank you for responding!

The house that passes from the trust to the beneficiaries would be considered a distribution of principal and not taxed as income, right? only the gain/loss (based on the change in FMV) would have a tax effect?

I may be missing something - I was likening this to an inheritance, outside of a trust, and you're given the FMV on the date of death, that value isn't taxed to you. You pay tax on the gain when it's sold.  I have not before worked with a real property going into a trust and then being distributed. Have been reading IRS docs and trying to figure out how to represent in ProSeries.  I appreciate your thoughts on the taxation of this. 

In ProSeries I see the worksheet, Amounts to Allocate to Schedules K-1, but do not see how to handle the distribution of principal.  I humbly appreciate your guidance.

[sjrcpa]

Show the distribution of property as Other Amounts Distributed. I think you use the carrying cost (dod value plus any additions). The way the income distribution calculation works, the distribution will be deemed to carry out current year net income. The net income amounts will appear on the K-1s.

[BobKamman]

Election of a fiscal year must be made on a timely-filed return.  You're too late for that. 

If the trust directed the house to be distributed in kind, then it may not be a K-1 item.  The three beneficiaries instructed the trustee to sell it?  The trustee has authority to do that, but not to file tax returns?  Has the house been sold yet?