Simple Trust Tax Question

[Southern Geek]

I'm in the process of filling out tax forms for a Simple Trust for which my wife is the trustee. She is also a beneficiary of the trust along with my 2 daughters. The only asset in the trust is a residential rental property. This year we had to replace the air handler in the rental property. When filling out the Schedule E for the rental, it is clear from the instructions that the expense for the replacement cannot be deducted for the year, but must be depreciated. The result is that the total income reported on the Schedule E exceeds the actual net income received by the trust from the property.
Each year the trust is required to distribute the net income. However, when filling out the 1041 for the trust, I realized that since the DNI is less than the income reported on Schedule E (the difference being the cost of the replacement), the trust will end up paying taxes. This doesn't seem right. Did I miss something?

 

[wolf]

Maybe it's me, but having hard time figuring out the details of your situation.

"air exchanger" Not sure what it is. Normally appliance depreciated over
7 years. (stove, washer, etc).
FED, allows, 50%, accelerated dept. 1st year.
My state, CA, does not.

Roofs, furnace Depreciated over longer term. I think, 27yrs, don't quote
me on this.

There are IRS tables you can use, to figure out the correct percentage for
each year. Not all States follow IRS depreciation rules, but are pretty similar.

Does, this property, still have depreciation attached to it? Or was all
depreciation used up, prior to inheriting. (I assume this was inherited).

Might, be easier, just to pay a CPA, to explain, and prepare taxes for one year.

Then, you can just follow the example for subsequent years.

 

[2B]

Since the only asset is a single family rental, can you sell the property and move to much easier to deal with mutual funds? This current setup appears to be a train wreck in escrow (IMHO).

 

[Gill]

Since the only asset is a single family rental, can you sell the property and move to much easier to deal with mutual funds? This current setup appears to be a train wreck in escrow (IMHO).

That's not really much help to the OP.
Bruce

 

[wolf]

Since the only asset is a single family rental, can you sell the property and move to much easier to deal with mutual funds? This current setup appears to be a train wreck in escrow (IMHO).

Check with CPA.

If property in good location. May be preferable to keep. Check out capital gains tax, step up in basis, etc. Many factors to consider.

Just because paperwork, is confusing, is not a reason to sell.

If the property is a money loser, and you are only keeping for sentimental reasons, then, selling may be an option.

Did Florida ever pass a "prop 13 tax rule", like we have in CA. If so, rental
income can be very profitable.

Again, Your situation is not that complicated. Just have to spend some $, and have CPA explain everything.

 

[2B]

That's not really much help to the OP.
Bruce

This deserves this ?

The OP indicated that the trust will owe taxes but is apparently cash flow negative. This isn't a good sign. What if they don't have a tenant for a few months? A single family rental is subject to so many issues regarding cash flow. Having just one and having it inside a trust seems to be a questionable decision.

As anyone that posts a question on a forum, they can certainly ignore my comment if they think it's not relevant.

 

[Southern Geek]

Maybe it's me, but having hard time figuring out the details of your situation.

"air exchanger" Not sure what it is. Normally appliance depreciated over
7 years. (stove, washer, etc).
FED, allows, 50%, accelerated dept. 1st year.
My state, CA, does not.

Air Handler is fan/condenser unit for HVAC, attached to outdoor heat pump (compressor).

Doing further research, thought I might be able to deduct expense via Small Taxpayer Safe Harbor rules that went into effect at the beginning of 2014. However, the expense exceeded 2% of the building cost basis.
OTOH, I miscalculated the depreciation on the building for the year. I had just carried over depreciation from prior tax year forgetting that it was only placed in service late that year. Fixing that error reduced rental income significantly thereby eliminating any federal tax owed by the trust.

Since the only asset is a single family rental, can you sell the property and move to much easier to deal with mutual funds? This current setup appears to be a train wreck in escrow (IMHO).

Considering selling the house this year. Were waiting for market to recover. Tenants would like to continue to live at location. Don't know if this will make it easier or harder to sell.

 

[Southern Geek]

This deserves this ?

The OP indicated that the trust will owe taxes but is apparently cash flow negative. This isn't a good sign. What if they don't have a tenant for a few months? A single family rental is subject to so many issues regarding cash flow. Having just one and having it inside a trust seems to be a questionable decision.

As anyone that posts a question on a forum, they can certainly ignore my comment if they think it's not relevant.

The trust was set up by wife's parents many years ago. The rental is their former residence which is in the trust. When they moved into ALF a number of years ago, they rented it to sons of neighbors who have been good tenants - always pay on time, take care of property, etc. The trust had other assets, but these were used up for ALF expenses. They both passed away a couple of years ago, and my wife became the trustee. Knowing what we know now, it would have been better if they had not set up the trust. Water under the bridge.
The trust complicates the cash flow as there is no cash on hand at start of each year due to required distributions at end of prior year. On an annual basis, the cash flow has always been positive.

 

[bingybear]

Is there still reason to have this in a trust?

I don't know a lot about this trust, but the cash flow sounds like potential problems with larger expenses.

If it is like holding real estate in an IRA... all the expenses must be through the IRA... one can not take care of any expense outside of the IRA. I would assume you could add money to the trust? Not saying you want to.

I thought trust tax rates started pretty high. but not an area I've dealt with much.