An irrevocable trust established many years ago is, pursuant to the terms of the trust, now being wound up. The only remaining assets are an odd piece of real estate that is now listed for sale, and a small bank account to fund ongoing expenses of the real estate.
There is no income potential from the real estate, and its expenses are only about $750 per year. The interest income from the bank account will be well under $100, the exemption amount for this trust.
Must tax returns be filed each year to keep track of the losses to be applied when the real estate is sold? Or can the trustee just keep track of these on his books and apply them to the final return in the year the real estate is sold?
There is hope, but also a realization that it might take a couple years for this property to sell.
There are many types of trusts. Some may be revocable by the maker, but become irrevocable on the death of the maker.
We need more information about the nature of this trust to properly advise you but I strongly suspect that there may have been a requirement to file since the death of the maker.
This trust was irrevocable prior to the death of the maker. Trust returns have been filed for many years. Now that the trust is in the process of being wound down, there is but one real estate asset, a small bank account, no taxable income, and small operating losses for the real estate until it is sold.
There is no income potential from the real estate, and its expenses are only about $750 per year. The interest income from the bank account will be well under $100, the exemption amount for this trust.
Must tax returns be filed each year to keep track of the losses to be applied when the real estate is sold? Or can the trustee just keep track of these on his books and apply them to the final return in the year the real estate is sold?
There is hope, but also a realization that it might take a couple years for this property to sell. ============ To the extent that what you're actually claiming is a net operating loss, yes, returns need to be filed.
It will actually be a non-allowed passive activity loss, to be carried forward until the property is sold, at which time it will be added to the basis with a resulting lowering of the gain on sale (or more likely increasing slightly the loss on sale).
If the property is not a rental, there would not be a "non-allowed passive activity loss". The expenses fall under expenses for the preservation of property (not income, per se), and deductible as a miscellaneous deduction subject to the 2% limit. Whether it can produce an NOL is beyond me. I would tend to say, "yes", but the cost of preparing the returns correctly would probably exceed, not only the eventual tax consequences of the loss, but the actual _loss_. (Note that TurboTax Business and most other "individual" business tax software do not compute NOLs, although most will carryback or -forward an NOL more-or-less correctly.)
If the property is not a rental, there would not be a "non-allowed passive activity loss". The expenses fall under expenses for the preservation of property (not income, per se), and deductible as a miscellaneous deduction subject to the 2% limit. Whether it can produce an NOL is beyond me. I would tend to say, "yes", but the cost of preparing the returns correctly would probably exceed, not only the eventual tax consequences of the loss, but the actual _loss_. (Note that TurboTax Business and most other "individual" business tax software do not compute NOLs, although most will carryback or -forward an NOL more-or-less correctly.) =========== I once had a discussion with IRS Speaker Andre Re about form 8829 (Business use of Home) and carried expenses & depreciation after the generating business is closed. If one wanted the benefit of the accumulated expenses/depreciation to offset the future sale of the residence, one had to file 8829s for all intervening years (at least as the IRS interpreted this in the 2000s) in order to carry that accumulation forward. Remember the mess where people did NOT file form 8606 every year and the IRS had problems with IRAs and their post-tax basis? Thus, when in doubt at the federal level, file the form.
In contrast, for state income tax purposes the California FTB says that continued filing isn't necessary for periods of non-residency (assuming no California source income), and that if a former resident returns to California, the FTB will pick up his carry forwards from his last resident return (from the prior period of residency), so I have heard (and think I read in the FTB pubs).
So, in applying this to your trust, at least file the federal 1041.
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