Inclusion of Expenses in Cost Basis of Decedents House

Discussion in 'Tax' started by Del Gran, May 8, 2012.

  1. Del Gran

    Del Gran Guest

    Mother's house was in a Revocable Trust that became Irrevocable on
    death. Currently about one year since DOD so post-mortem expenses
    related to house during the period the Trust is holding the house
    until sold have become significant.

    House receives a step-up of cost basis on death to FMV as of date of
    death. Real estate taxes are deductible on Form 1041 but there is no
    income so the deduction is lost if claimed on Form 1041.

    In addition to real estate taxes, there is insurance, utilities, yard
    maintenance, advertising, etc that I am hoping to add to the FMV as of
    DOD to determine the cost basis when sold.

    Although these expenses are routinely added to cost basis for those
    flipping houses, my accountant has some concern as to whether this is
    legitimate for a Trust.

    Accountant cites an election to capitalize real estate taxes and
    interest but not sure this is applicable to Trust. There is no
    interest since there is no loan. Obviously, my question is broader
    since it includes adding all expenses to the cost basis. House is
    empty except when I am there as Trustee so there is no rental income.
     
    Del Gran, May 8, 2012
    #1
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  2. Del Gran

    D. Stussy Guest

    "Del Gran" wrote in message

    Mother's house was in a Revocable Trust that became Irrevocable on
    death. Currently about one year since DOD so post-mortem expenses
    related to house during the period the Trust is holding the house
    until sold have become significant.

    House receives a step-up of cost basis on death to FMV as of date of
    death. Real estate taxes are deductible on Form 1041 but there is no
    income so the deduction is lost if claimed on Form 1041.

    In addition to real estate taxes, there is insurance, utilities, yard
    maintenance, advertising, etc that I am hoping to add to the FMV as of
    DOD to determine the cost basis when sold.

    Although these expenses are routinely added to cost basis for those
    flipping houses, my accountant has some concern as to whether this is
    legitimate for a Trust.

    Accountant cites an election to capitalize real estate taxes and
    interest but not sure this is applicable to Trust. There is no
    interest since there is no loan. Obviously, my question is broader
    since it includes adding all expenses to the cost basis. House is
    empty except when I am there as Trustee so there is no rental income.

    ===================
    Lost? It is possible to argue that the maintenance of a[n appreciated]
    capital asset by a trust may be of business character for purposes of applying
    section 172 (net operating losses), and thus it will not be lost; merely
    deferred until the estate/trust terminates, and permitted as a distributed
    deduction to the beneficiaries as an "excess deduction on termination" (IRC
    Section 642(h)).

    However, Section 692(a)(3) may contraindicate such treatment.

    Your accountant should look for court cases on the subject for the answer.
     
    D. Stussy, May 9, 2012
    #2
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  3. House receives a step-up of cost basis on death to FMV as of date of
    Who paid the real estate taxes? If the trust had income, it could have paid the taxes, mortgage interest, etc. But I assume one of the beneficiaries paid it as the trust had no income. Can the beneficiary then take the deduction?

    Nothing in IRC 266 or the code of regulations for it at http://www.gpo.gov/fdsys/pkg/CFR-2005-title26-vol3/xml/CFR-2005-title26-vol3-sec1-266-1.xml suggests to me that a trust cannot do this.
    This seems too good to be true. Business losses are deductible as ordinary income, like a negative number in Line 21 or Line 14, which is the best place to deduct a loss. But if the person were alive, the deductions would be on Schedule A, where they are subject to phaseout, 2% rule, AMT, etc.
    Where is IRC 692. My search engine cannot find it.
    Out of curiosity where would one look?
     
    removeps-groups, May 10, 2012
    #3
  4. Del Gran

    D. Stussy Guest

    However, Section 692(a)(3) may contraindicate such treatment.

    Where is IRC 692. My search engine cannot find it.
    ========

    OOps. Typo. should be IRC section 691(a)(3).
     
    D. Stussy, May 10, 2012
    #4
  5. Del Gran

    Del Gran Guest

    Trust paid the Real Estate Taxes and all the other expenses. Trust
    has asssets but, with current bank interest, interest is negligable so
    no income (under $100).
    Will need to file both 2011 and 2012 Form 1041 since we are now over
    one year. Accountant said 2011 taxes could be added to cost basis but
    didn't have a basis for claiming expenses like insurance, yard
    maintenance and utilities although no problem adding items that would
    normally be considered maintenance to the cost basis.

    On the Final Form 1041, these "normal expenses" would be treated as
    "Deductions in Excess of Inocme" and flow through to the Beneficiaries
    Schedule A miscellaneous deductions. One beneficary doesn't itemize
    deductions so only one beneficiary would benefit.

    Accountant suggested this forum as he didn't feel my costs for the
    research necessary for him to obtain a basis (Ie court cases)
    justified the gain. So far, I haven't added these expenses up so not
    sure whether it is worth it or not. Alternative is for me to prepare
    my own Form 1041 as I have used TurboTax Business since 1997 and only
    the 1041 issues are new to me. Also, with fiduciary responsibility,
    prefer to do even more "Due Dilligence" than normal and I am also the
    "inqisitive type".
     
    Del Gran, May 11, 2012
    #5
  6. I'm not sure if IRC 266 lets you capitalize maintenance.
    Tough, that's a limitation with the standard deduction -- if you use it, then you lose itemized deductions up to the value of the standard deduction. On the bright side, state tax refunds are not taxable.
    See the quote or IRC 691 that Stussy posted. It looks like the character of the deduction cannot be changed. Ie, if the person were alive, they would deduct property taxes, but lose if their itemized deductions too low, so same holds for beneficiaries.

    BEGIN QUOTE

    (3) Character of income determined by reference to decedent
    The right, described in paragraph (1), to receive an amount shall be treated, in the hands of the estate of the decedent or any person who acquired such right by reason of the death of the decedent, or by bequest, devise, or inheritance from the decedent, as if it had been acquired by the estate or such person in the transaction in which the right to receive the income was originally derived and the amount includible in gross income under paragraph (1) or (2) shall be considered in the hands of the estate or such person to have the character which it would have had in the hands of the decedent if the decedent had lived and received such amount.

    END QUOTE
     
    removeps-groups, May 11, 2012
    #6
  7. Del Gran

    D. Stussy Guest

    wrote in message

    I'm not sure if IRC 266 lets you capitalize maintenance.
    Tough, that's a limitation with the standard deduction -- if you use it, then
    you lose itemized deductions up to the value of the standard deduction. On
    the bright side, state tax refunds are not taxable.
    See the quote or IRC 691 that Stussy posted. It looks like the character of
    the deduction cannot be changed. Ie, if the person were alive, they would
    deduct property taxes, but lose if their itemized deductions too low, so same
    holds for beneficiaries.
    =============

    Like I said, there's law on BOTH sides of the issue. That's why one must look
    at court cases.

    Please reference me properly: Mr. Stussy to you.
     
    D. Stussy, May 11, 2012
    #7
  8. Del Gran

    MCal

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    I have the same situation. Sale of a co-op in what was a Revocable Living Trust, selling at a loss with 2 1/2 years of expenses to maintain it. No income for the trust beside the proceeds of the sale. What was your final resolution?

    I have actually hired professionals and they give me conflicting advice. One wants to put all the costs over all the years into the cost basis on the final return. One says expenses are not deductible (That I know is not true) and just closing costs, special assessments, and improvements can go toward cost basis.
     
    MCal, Jan 25, 2017
    #8
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