1040 to 1041 (rental property)

[ILLMAS]

TP has been reporting rental income and expenses on their personal taxes for a past couple of years, however they recently found out the rental property should of been reported on a trust return and TP as a beneficiary, what kind of problems can arise from amending the individual return and reporting it on trust return?  Mostly interested on the trust side.

 

[Ringers]

I believe that as long as TP is the sole beneficiary of the Trust then the net rental income or loss would have been passed through the trust to the TP as a gain or loss on lines 7 or 8 of the Trust's K1 and thus correctly reported on TP's 1040 as passive income or loss.

[ILLMAS]

Thanks, but how about penalties for filing late trust returns? 

[Ringers]

If it turns out that there would be no change in the TP's 1040 with the filing of the Trust returns for past year, I would probably just file Trust returns from this point on and show the rental property as belonging to the Trust.  If IRS got involved in a later year I would show "substance over form" and that there was confusion as to whether or not the asset was a Trust asset which was resolved during the current year.   It has been my experience that IRS is not interested in "reinventing the wheel" if the bottom line tax situation would be the same.

[Abby Normal]

If this is a revocable lifetime/family trust, you don't file a 1041.

If this is a standard trust, you'll need a trust bank account, tenants must make out rent checks to the trust and expenses must be paid from the trust checking account.

If the trust has income, the beneficiary must take distributions from the trust to pass out that income. Otherwise, the trust pays the taxes.

If the trust has losses, I think the losses stay in the trust to be used against future passive income.

 

[Terry D EA]

I*'ll just add my 2 cents worth. Abby said the magic word 'IF". Before you do anything, find out what type of trust this is, get the trust instrument and read it. Doing so will give you all the details you need regarding what the trust is, terms, and tax filing requirements. I never touch any trust of any kind unless I have the trust instrument. There are trusts that have exhorbant penalties to do this any other way.

[ILLMAS]

Good points, thanks everyone.