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Refer to the prior trust (taxpayer die in 2013 and the

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living trust become the simple...
Refer to the prior trust (taxpayer die in 2013 and the living trust become the simple trust-each year the tax is pass thru to beneficiary -each receive a k-1, the trust don't pay taxes): there is a commericial rental which has not been rent out since his death.1.the expenses incurred in that property would be treat as investment property subject to 2% floor and directly reduce the trust level income. is that correct?
2. Does it matter if the investment expenses above allocate to exempt interest income or taxable income? The trust is silence on the deduction allocation
Submitted: 11 months ago.Category: Tax
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9/22/2017
Tax Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 11 months ago
Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Tax
Satisfied Customers: 2,767
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
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Hello my name is ***** ***** I will be able to assist you today.

The expenses would not be deductible subject to investment expense if the property was not being used as a part of a for profit business. From your description " there is a commericial rental which has not been rent out since his death. "

One of the principles underlying the tax rules for deductions is that your income for the year should only be offset by those expenses that contributed to earning that income.

You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income limit. On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9, you can deduct the ordinary and necessary expenses that you pay:

  1. To produce or collect income that must be included in your gross income,

  2. To manage, conserve, or maintain property held for producing such income, or

  3. To determine, contest, pay, or claim a refund of any tax.

https://www.irs.gov/publications/p529/ar02.html

For more information on business bad debts, see chapter 10 in Pub. 535. For information on nonbusiness bad debts, see chapter 4 in Pub. 550, Investment Income and Expenses.

If the property is not ready and available for rental purposes, then the property is not part of a for profit business.

If you have any other questions please let me know.

Regards,

Chad CFP ® professional

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Customer reply replied 11 months ago
this is on the trust return 1041, not personal. my question is after the 2% AGI, is the remaining amount directly offset the income on Form 1041. thus the beneficary k-1 would have net of those deduction already.
Tax Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 11 months ago

1.the expenses incurred in that property would be treat as investment property subject to 2% floor and directly reduce the trust level income. is that correct? - NO, that is not correct.

What is the remaining amount you are talking about?

The K-1 should be net of all applicable income and deductions.

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Tax Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 11 months ago

If the property is not part of a business then the property expenses would not be deductible in any shape or form in most cases.

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Tax Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 11 months ago

Expenses to maintain the trust and pay for building maintenance may be deducted from revenue created by the trust for trust accounting purposes, but not income tax purposes

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Tax Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 11 months ago

simple trust is one that is required to distribute all of its income. The income is only determined after all the expenses have been paid. The K-1 will reflect the amount of remaining income that is distributed to the beneficiaries. If the trust does not pay taxes, then the beneficiaries may be responsible for any taxes owed on the income created by the trust.

expenses incurred by the trust to own a commercial property are not tax deductible in and of themselves. The property should be placed in service and available for rent in order for expenses to be deductible by the trust.

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Customer reply replied 10 months ago
Since this is inactive rental property, the expenses would be treated as investment expenses. thus it still can be deduct in the Trust only it subject to the 2% limitation. those example if the iinactive rental incur 3000 in insurance, fence rental. the trust still can deduct 2940 (3000X98%) on 1041. thus reduce the beneficiary's other income by 2940. Am I correct?
Tax Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

The owner of the property, in this case the trust, must have a profit motive or the IRS would disallow any deductions because the property would be viewed as personal property.

The 2% limitation means you can only deduct the portion of your expenses that exceeds 2% of the Adjusted Gross income of the trust. What is the Adjusted Gross income of the trust? - Your above example does not appear to be correct.

Here are examples of investment expenses that may be deductible to the trust. The items you listed above, such as insurance does not fit the list for investment expenses.

  • fees you pay to a broker, bank, trustee, to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock
  • attorney or accounting fees you pay to produce or collect taxable income
  • fees you pay for counsel and advice about investments that produce taxable income (this includes amounts you pay for investment advisory services)
  • monthly service charges you pay to a bank to participate in an automatic investment service
  • rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents (if you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent), and
  • office expenses, such as rent and clerical help, that you pay to make your investments and collecting the taxable income from them.

Rental expenses you incur during this time period are deductible as long as you're actively trying to rent or sell the property.

You would still deduct the total expenses (deductible for taxes or not) from any income proceeds the trust produced before you issued the K-1

Here is a quote from IRS Publication 527

"Vacant rental property. If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you cannot deduct any loss of rental income for the period the property is vacant. "

Here is a link from intuit tax where someone asked a similar question however the period when the property was vacant was six months and the property was available for rent or sale.

https://ttlc.intuit.com/questions/2302155-rental-expenses-while-vacant-and-listed-for-sale-and-or-rent-which-ever-came-first-and-then-rented

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Tax Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

If you have any further questions please let me know.

If you are satisfied with this answer, a positive rating by clicking on three stars or more would be appreciated.

Thank you!

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