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Question

1041 Trust return, 3 beneficiaries, house sold

Forum|Forum|3 years ago
April 3, 2023
2 replies
15 views

Dad died 7 years ago and house went into his trust, 2022 house was sold, had quite a bit of gain.

One of the beneficiaries lived in the house as a personal residence for the 7 years between when Dad died and the house was finally sold.

Does he get the IRC121 exclusion? How does that figure into the 1041 return?

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IRonMaN

Level 15

The trust was the owner, not him. Doesn't sound like there is any exclusion coming.

Slava Ukraini!

Just-Lisa-Now-

Author

Intuit Community Champion

that's what I thought as well, but I see that the 1041 does have a HomeSale worksheet in the list of forms so I thought maybe I was missing something...when would a 1041 use the Homesale worksheet?

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

IRonMaN

Level 15

When? You got me.

Slava Ukraini!

BobKamman

Level 15

Of course the knee-jerk reactions here are always NO! But I would keep trying to find a way to get to YES! As for the question on where you would use the exclusion on a Form 1041, see this:

Treas. Reg. Sec. 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.

But why was this trust not terminated seven years ago? Is there a provision in it, that required it to continue? Is it still in existence, with other assets? I think you have more of a "substance over form" case, where really the other beneficiaries just kept legal title in the trust but equitable title among themselves.

Just-Lisa-Now-

Author

Intuit Community Champion

I read that exact section that you highlighted, but I wasnt sure what constituted "others as substantial owners". I could see it if the house was co-owned by the trust and someone else on the title.

I'll need to talk to the trustee again. The house was all there was left, I'm not sure why they waited so long to sell it.

So the other beneficiaries wouldn't get the exclusion, how would it only be allocated to one of them? The mechanics of reporting it on the return seemed to trip me up enough that it didnt seem like it was right..

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

BobKamman

Level 15

They should have deeded the house to the three beneficiaries, before they sold it. Then it's not a trust problem, it's a beneficiary with a Section 121 issue who may have a problem. I would want to see the trust document, to find a reason the sale was delayed so long. Smells like breach of fiduciary duty.

I don't think the exclusion goes on the 1041, though. The question is how to show it on the return of the beneficiary who may qualify. He has a Schedule K-1 that shows a large capital gain, right? He can leave it off the trust distributions line of the Schedule D, run it up the 8949 flagpole and see if IRS salutes it.

Has the trust been paying the real estate taxes all this time? Anyone claim those deductions? If there was income, looks like a good way to get around the SALT cap until you get caught. How about insurance, maintenance and repairs? 100% paid by the occupant? Looks like rent to me, for the 2/3 not owned.

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