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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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I am the trustee and beneficiary of an irrevocable trust. I

Resolved Question:

I am the trustee and beneficiary of an irrevocable trust. I have the discretion to purchase real property. 2 questions:
If I purchase a home in the name of the trust , and live in it as my primary residence, can I deduct mortgage interest and property tax from the gross income of the trust?
If the trust sells the house after I have lived in it full time for 2 years, and if there was appreciation upon the sale of the home, would the trust be able to claim the personal residence exclusion of 250,000 Or would it be taxable income for the trust?
Submitted: 2 years ago.
Category: Tax
Expert:  R. Klein, EA replied 2 years ago.

Randalltax :

Thanks for asking today.

Randalltax :

Generally, you can deduct mortgage interest and tax if it was a rental property. However, personal use is disqualified because the test to deduct mortgage interest is that it must be for your personal residence.

Randalltax :

The trust does not "live" anywhere; the beneficiary lives in the house that is not owned by the beneficiary.

Randalltax :

Similiarly, the trust cannot get the benefit of the capital gain exlcusion because it was not the trust that lived in the house as its main residence. It was a beneficiary.

Randalltax :

Boy, I wish I could edit the above, because I was not able to put in the exceptions....which would apply.

Randalltax :

Section 1.121-1(c)(3)(i) Trusts. If a residence is owned by a trust, for the period that a taxpayer is treated under sections 671 through 679 (relating to the treatment of grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the trust will be treated as if made by the taxpayer.

Randalltax :

If the trust meets the above rule, however, the EXLCUSION CAN apply to the capital gain.

Randalltax :

An irrevocable trust can pass the mortgage interest and taxes to the beneficiary, as well as income, so you can deduct these items only on your personal return level.

Customer: If I am not the grantor but rather the trustee and beneficiary does the exclusion apply according to sections 671 to 679?
Randalltax :

If the trust was not set up by you, for you, then you may be out of luck. You should consult an attorney who can read the trust documents as I um unable to do that here.

Customer: Last question
Customer: If the trust purchases a property for rental income and investment purposes,
Customer: can the net rental income be distributed to the beneficiaries , just as dividends and interest currently are and taxed at the beneficiary's individual tax rate?
Customer: Thank you for your time
Randalltax :

That depends on the type of trust. The trust is either simple or complex. A simple trust always distributes all current income to the beneficiaries.

Randalltax :

A complex trust must follow the trusts rules which can vary.

Randalltax :

An "irrevocable" trust type does not necessarily differentiate between complex and simple type

Randalltax :

So, again, without seeing the actual document, I cannot comment on what your document says.

Randalltax :

Sorry for the lack of specific information, but trusts are not uniform in nature; almost every one is customized in some way or fashion that requires the document to be reviewed in person.

Customer: Its a complex trust, with the discretion to distribute. Can the beneficiary receive the net rental income
Customer: and have the tax paid by the beneficiary. Otherwise it doesn't make sense to pay at the trust tax rate.
Randalltax :

Yes, correct. As long as the trust actually distributes the rental income you can pass the income to the beneficiaries.

Customer: Can it be distributed as distributable net income , the trust allows it, just like a dividend or interest payment would be distributed?
Randalltax :

That is correct.

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2927
Experience: Over 20 Years experience
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