age out of a trust with real estate rentals

[michaelmars]

maybe i am just too tired to think it through right now but the situation is:

client aged out of a trust left by mom for 3 kids. she now gets her share of the rent individually since they are treating it as joint ownership without a formal partnership. [the trustee is set in his ways and will not change anything]

now that my client is getting rent income shouldn't she have basis for depreciation? I think it would be her share of original basis on the trust less her share of prior accum depr. the trustee is only providing, because "he knows everything", the FMV as of the date she aged out.

fortuneately its a triple net lease so the only items reported are rent income, depreciation, and this year attorney fees negotiating a new lease.

[jasdlm]

Is the trust still running for the other two kids? If it's an informal partnership, wouldn't the k1 she's receiving give income after the depreciation was taken? Am I misunderstanding the facts?

[michaelmars]

Trust is in effect for other 2 kids. but my client gets a rent 1099 directly from the tenant. the tenant pays my client 1/3 of rent and the trust 2/3's

[jasdlm]

Trust is in effect for other 2 kids. but my client gets a rent 1099 directly from the tenant. the tenant pays my client 1/3 of rent and the trust 2/3's

So the partnership is a partnership of the trust and your client? Shouldn't there be a 1065 then, with k1s to the trust and your client? I agree that your client should share in the depreciation deduction, but I don't see how you manage this other than through a 1065, even if the partnership is informal. Maybe someone can set me straight.

[Bart]

the tenant pays my client 1/3 of rent and the trust 2/3's

Your client really has a tenant that writes two rent checks each month?

[michaelmars]

as i first said its not structured correctly and the trustee is too old to change and the bene's don't have the means tohire an attorney etc. the other kids will age out in 2-3 years and the trust will end. there is no partnership, the property was owned by the trust and when one kid turned 30 the trustee changed the deed to show trust and the kid as owners. so its either tenancy in common or jointly held property without a partnership in existance. the tenant was on a 49 year lease which expired last year and while negotiating a new one is month to month so they are very accomidating to whatever the trustee says. And yes they issue 2 rent checks and 2 1099's. Its a major supermarket chain that is the tenant.

[Guest Taxed]

I am dealing with a trust issue now where the trustee has been disabled (stroke) and the beneficiaries can not agree to name a successor trustee. This happened last year and for 2012 the books are in a mess. No one knows what is going on, except that the trust continues to collect rental income, trust has a full time handymad (W2 employee) and they continue to pay property taxes and interest. I am not sure who has been signing the checks but have a suspicion that it is one of the benes, who used to handle phone calls etc from tenants.

[ljwalters]

Is the trustee also the tax pretarer. If not you could have your client contact the preparer and request copy of the Tax return for prior years showing the deprieciation schedule.

[michaelmars]

i could get the depreciation schedule, what i am questioning is how to calculate the basis in my clients hands. I think its the original basis [plus improvements] less prior depreciation. He told my client that its FMV at time of the property being distributed. I am just asking to double check myself.

[michaelmars]

BUMP

[jasdlm]

I agree with your basis calculation; disagree with the FMV at time of distribution as basis suggestions.

Apologies for misunderstanding your original question.

[Ranger]

I believe in this situation your client’s interest is treated as a remainderman. So basis would be 1/3 of the basis on date of transfer.

I am not certain if depreciation period starts over or if you carry on with 1/3 of current depreciation schedule.

Basis is definitely not FMV on date of transfer.

[michaelmars]

i agree not fmv just stated that that is what the trustee was telling them. 1/3 of basis i also agree with, but i havent thought about the possibility of the period restarting. Somehow i don't think thats right because the right off would be so diminished.

[Ranger]

My thought is that the remainderman steps into the shoes of the trust and would continue with 1/3 of current deprecation schedule. But I don’t have anything to back that up with.