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Hi and welcome to our site!Yes - the type of income/loss items are passed to beneficiaries and reported to beneficiaries tax returns accordingly..first of all different income items are reported in different boxed on K1 - http://www.irs.gov/pub/irs-pdf/f1041sk1.pdfFor instance - Interest income is reported in box 1, dividends are reported in boxes 2a and 2b, etc.If we take a look at the second page of K1 - it explains how different items from K1 are transferred to the beneficiary;'s individual tax return.For instance 1. Interest income -> Form 1040, line 8a2a. Ordinary dividends -> Form 1040, line 9a2b. Qualified dividends -> Form 1040, line 9b
14. Other information A Tax-exempt interest -> Form 1040, line 8betc.Your assumption is also correct - if the beneficiary has capital gains passed from the trust on K1 - that income may be fully offset by capital losses that the beneficiary has on his/her own.Similarly - passive rental income passed from the trust on K1 may be offset by other passive losses realized by the beneficiary.