Trust and principal residence

[Margaret CPA in OH]

Client's mother passed away, principal residence in trust. Residence was sold to outside party. Half was rented beginning in 1952 and I have all depreciation schedules to date. They are wrong (5 years for the property depreciation) but I can recalculate the allowable.

In 1041 Schedule D it does have sale of principal residence data entry but the maximum exclusion does not fill in and has no link. I did check the box at the top tha the decedent would qualify. If not, then it would be the reduced exclusion, correct?

Would not this property (adding back depreciation taken) still qualify for some exclusion? The selling price was $123,500.

[kcjenkins]

Essentially what you have is two transactions. 1 Sale of rental property. 2 Sale of principle residence. It's not going to work if you try to combine them.

[Margaret CPA in OH]

Thanks, KC. On the Sale of Principal Residence tab, though, there is a place in Part 2 for allowed or allowable depreciation taken on the property after May 6, 1997. I thought that was where the information related to the rental portion would be accounted for. No? I still don't understand why the max exclusion does not populate in the field of the Sch. D. Any ideas?

I will keep digging.

[kcjenkins]

Seems it should work as you thought, but since it does not, try my alternative and see if that works. Let us know if it does. I think the program just can't deal with the combination. Since there is no exclusion on business property.

[jainen]

>>In 1041 Schedule D it does have sale of principal residence but the maximum exclusion does not fill in and has no link.<<

I think that applies if the BENEFICIARY uses the property as a primary residence. Otherwise an irrevocable trust is not eligible for Section 121 exclusion, regardless of how the grantor previously used the property.. See Letter Ruling 200104005.

[kcjenkins]

I was ASSUMING [my bad] that it was the bene that had used it as a principle res. You bring up a good point, Jainen That's why we all love you!

[Margaret CPA in OH]

Thanks to you both. I have since consulted a local tax attorney who has dealt with such matters. Her research and opinion is that, upon death, the residence became an asset of the irrev trust, valued at fmv at dod, and the potential depreciation recapture goes away as the trust would not have benefited from the deduction. Along with the selling expenses, there will actually be a small loss to flow through to benes. This actually seems very reasonable to me but, as we know, the tax code is not always reasonable.

Any comments on this interpretation?

[Guest Taxed]

Very interesting! I can see the logic. The trust did not get any benefit of the depreciation?

But what was the FMV at death? Is it simply what the market value of the entire property or the market value (with depreciation adjustment) for 2 components. The primary residential portion (no depreciation there) and the rental portion?

Did the tax attorney give you any cites. If yes would you be willing to post it here (of course take out all identifying info of your client).

[Margaret CPA in OH]

I do have some cites but won't get to the organization of posting until probably tomorrow. However, it seems to me fair market value is the market value as of a specific date - dod - regardless of prior use. The entire property was sold as a unit.

Good points, though!

[jainen]

>>The entire property was sold as a unit.<<

Previous use doesn't matter, but it sounds like the trust would still report as two sales. Allocate proceeds and expenses by any reasonable method such as square footage or relative values. Assuming the tenant remained after the death, report the rental part on Form 4797. Report the investment or personal part on Schedule D (nondeductible loss if a beneficiary used it personally).