Distributions from complex trust with only rental loss carryforwards

[David]

The only activity in a client's complex trust is a rental property. There have only been rental loss carryforwards reported each year.

In 2019 both beneficiaries took distributions totaling $5K. The only reason they are able to take distributions is because of depreciation deductions through the years. In 2019 the trust is reporting $5K rental loss, $10K depreciation and, with the current year $5K rental loss, the total loss carryforward is $35K.

My question is how should the K-1 report the distributions? Shouldn't the K-1 report $2,500 to each beneficiary in box 9 as depreciation deduction and the $10K depreciation on Sch E be reduced to $5K and the loss carryforward reduced to $30K?

Or is it more complicated than what I am thinking?

Thanks for your help.

 

[DANRVAN]

If the trust did not have any Trust Accounting Income, then there would be no reporting of depreciation as a separately stated item to the the beneficiaries per  Reg 1.167(h)-1(b).

 

[Abby Normal]

If the 5k loss is after the 10k depreciation then the rental shows a 5k profit, which is offset by 5k of depreciation (separately stated), right?

[David]

So are both of these numbers shown on the K-1 and result in no tax impact?

Is this because there have always been rental loss carryforwards and because a distribution was able to be made only because depreciation isn't a cash impact?

So the distribution isn't considered from principal?

Thanks.

[DANRVAN]

16 hours ago, Abby Normal said:

the rental shows a 5k profit

I didn't catch that.

In this case, the 100% of depreciations goes to beneficiaries since 100% of the TIA was distributed to them per the reg.

Rev. Rul. 74-530, 1974-2 CB 188 confirms that they are allowed depreciation in excess of their K-1 reported income.