Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Simple Trust Tax Question
Old 01-24-2015, 11:13 AM   #1
Recycles dryer sheets
Southern Geek's Avatar
 
Join Date: Oct 2010
Location: Orlando
Posts: 69
Simple Trust Tax Question

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?
__________________

__________________
When did I ever find the time to work for a living???
Southern Geek is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-24-2015, 02:45 PM   #2
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 409
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.
__________________

__________________
wolf is offline   Reply With Quote
Old 01-24-2015, 02:50 PM   #3
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
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).
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Old 01-24-2015, 03:15 PM   #4
Recycles dryer sheets
 
Join Date: Jun 2010
Location: Southwest Florida
Posts: 326
Quote:
Originally Posted by 2B View Post
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
__________________
Gill is offline   Reply With Quote
Old 01-24-2015, 03:20 PM   #5
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 409
Quote:
Originally Posted by 2B View Post
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.
__________________
wolf is offline   Reply With Quote
Old 01-24-2015, 04:10 PM   #6
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Quote:
Originally Posted by MBMiner View Post
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.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Old 01-24-2015, 04:39 PM   #7
Recycles dryer sheets
Southern Geek's Avatar
 
Join Date: Oct 2010
Location: Orlando
Posts: 69
Quote:
Originally Posted by wolf View Post
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.

Quote:
Originally Posted by 2B View Post
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.
__________________
When did I ever find the time to work for a living???
Southern Geek is offline   Reply With Quote
Old 01-24-2015, 04:57 PM   #8
Recycles dryer sheets
Southern Geek's Avatar
 
Join Date: Oct 2010
Location: Orlando
Posts: 69
Quote:
Originally Posted by 2B View Post
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.
__________________
When did I ever find the time to work for a living???
Southern Geek is offline   Reply With Quote
Old 01-24-2015, 05:53 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Posts: 1,662
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.
__________________

__________________
bingybear is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Oil - Simple question, Simple answer? imoldernu FIRE and Money 14 12-18-2014 03:31 PM
Rental property basis in trust vs. not in trust Dash man FIRE and Money 2 04-19-2014 08:20 AM
Tax implications of echanging fund into my SIMPLE IRA thefed FIRE and Money 0 12-23-2008 01:22 PM
simple tax rate question bobbee25 FIRE and Money 2 07-16-2007 04:38 PM
Minimum Income Tax/ Simple IRA ferco FIRE and Money 1 06-18-2005 08:15 AM

 

 
All times are GMT -6. The time now is 11:18 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.