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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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I am looking ways to reduce taxable income that is coming

Customer Question

I am looking for some ways to reduce taxable income that is coming from a generation skipping trust (GST). Currently, the GST owns a single piece of commercial real estate and the available depreciation is not enough to match the current income, leaving a large amount of taxable income to pass thru. I have looked into doing a segmentation study on the facility but it is too old to warrant the benefit.
The current GST beneficiary is my parents but I am the current trustee. Once they pass, I will become the beneficiary.
My question is this…I am a pilot and am getting ready to enter into a partnership on an airplane whose purchase price is similar in magnitude to the value of the real estate. The plane is used mostly in business for the entity that currently leases the real estate that is owned by the GST. Is there any easy way to allow the depreciation on the airplane to be available to the gift trust to offset current income for my parents? My concerns are that there is no liquidity in the trust with which to purchase the airplane and I don’t know if this type of arrangement would pass muster with the IRS.
Thanks in advance for any insight you may have.
Submitted: 10 months ago.
Category: Tax
Expert:  Lev replied 10 months ago.

You would not be able to "reduce income" if there is income - it will be taxable.
What you are trying to do - to add deductible expenses - but you would need to consider additional income related to such expenses.

For instance - assuming the GST will purchase the airplane and will rent it to you or the partnership you are planning to enter.

In this case - I assume that the GST will charge fair rental fees - correct?

and correspondingly will be able to deduct related expenses - such as depreciation, insurance, maintenance, etc.

In this case the question would be if that is for -profit activity?

If yes - there is no issues. But that will ADD taxable income for the GST - not reduce income as you might think.

If you do not charge a fair market rent - the question would be raised - if that is not-for -profit rental? and if the answer is positive - some deductions would be disallowed - and again - taxable income would not be lower.

If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.

Expert:  Lev replied 10 months ago.

What if the GST will charge a fair rental fees? Will that allow to report rental losses and offset other taxable income? That is possible but only till some extend...

If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit.

Postponing decision. If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity.

Expert:  Lev replied 10 months ago.

So far - if you entered into another activity with the purpose to generate a loss and reduce current income tax liability - that might not work as designed...

Sorry if you expected differently.

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