Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
How to report capital loss on K-1 from trust
Posted by: SJenkins, February 19, 2009 01:57AM
I administer a simple trust that has a capital loss this year due to the stock market crash. I have interest, and dividends of $8300, expenses of $7900 and capital LOSS of $18344. Do I report the capital loss on the K-1 ?? This is an ongoing trust that will be active for several more years. If I report it, please tell me where and how to report it on the form.
Also, it appears that the distribution to the beneficiary is $400 with no deduction for the capital loss. Is this correct??
Thanks so much for your help

Re: How to report capital loss on K-1 from trust
Posted by: edcosoft, February 19, 2009 04:20AM
You cannot distribute a capital loss (so it never gets on a K-1) so if you retain it and distribute the net $400 it will all carryoveer into following years (use CLCarryover worksheet for 1041). OR, you could NOT distribute the net $400, leaving it in the trust to be offset by $400 of the capital loss.

Ed, author of the 2012 IRS form 2210 AI calculator. www.edcosoft.com/qitc.html

Re: How to report capital loss on K-1 from trust
Posted by: Herb, February 20, 2009 04:45AM
This may be a red herring, but why does the trust have expenses of $7,900. Seems rather high just for administration.

Re: How to report capital loss on K-1 from trust
Posted by: Drewremedy, February 20, 2009 07:38PM
I gotta admit $7900 of expenses jumped out at me too! How do you get those level of expenses ? Are you running Real estate loss operations thru a trust? Ouch!

Re: How to report capital loss on K-1 from trust
Posted by: SJenkins, February 20, 2009 08:57PM
Okay --so just to be sure I have this correct --in past years I put the capital gains on the K-1 and the beneficiary had to pay taxes on those gains, but the beneficiary does not get the deduction for the captial loss??
Also, If I do not pay the beneficiary the $400 I still need to put it on line 18 of the 1041 under income distribution deduction??
Thanks again for your help on this.

Re: How to report capital loss on K-1 from trust
Posted by: SJenkins, February 20, 2009 08:59PM
The trust owns automobiles so I have expenses such as maintenance and insurance.

Re: How to report capital loss on K-1 from trust
Posted by: edcosoft, February 20, 2009 10:29PM
Unless your State law and the Trust specifically allow gains to be considered income you cannot distribute capital gains to beneficiaries. The trust retains the gains, pays the tax on them and then if the other income isn't enough the trust can distribute corpus.

The income distributiion deduction is limited by how much is on the K-1s, which is an indication of how much you paid the beneficiaries. Rarely, you *could* complete the K-1 and income distibution deduction *as though* the $400 were paid. See line 10 of Shedule B "other amuonts paid,credited....". In effect the bene would be gifting the $400 amount back to the trust if you didn't give him the cash after distributing the income.

Note the term "distribute" means allocating the tax responsibility for, not necessarily actually giving cash.

There is specific prohibition to distributing losses from a trust except in the last year of the trust. Have you read the instructins for form 1041?

Ed, author of the 2012 IRS form 2210 AI calculator. www.edcosoft.com/qitc.html

Re: How to report capital loss on K-1 from trust
Posted by: SJenkins, February 21, 2009 05:02PM
Thank you again for your response

The trust states that all income is to be distributed to the beneficiary each year. This trust does not pay any taxes. So in the past, capital gains have been reported on K-1 per the IRS instructions under line 3, 4 -- "enter the beneficiarys share of the net gains minus deductions".

Does this make any difference in the way the capital loss is treated for this year.

Re: How to report capital loss on K-1 from trust
Posted by: edcosoft, February 22, 2009 01:15AM
The problem is that gains are not usually considered income, and there are laws regulating trusts. Each state's law might be different, and each trust is worded differently, but in order to considere gains as income the trust must so allow it, as well as the state (which usually says it's O.K. if the trust says it's O.K). so, your quote of line 3 merely allows for distribution of gains if gains are allowed to be distributed or considered as income by the trust.

Again. You cannot distribute capital losses. See Instructions for 1041 page 33 box 3 and 4 Also, there would be no gains to distribute in a year when you have a net capital loss.

Ed, author of the 2012 IRS form 2210 AI calculator. www.edcosoft.com/qitc.html

Re: How to report capital loss on K-1 from trust
Posted by: Retired Person, February 22, 2009 01:34AM
Edcosoft,

One thing that I have been confussed about is the case when the Trust has a short term capital loss and a larger long term capital gain.

If the trust and the state allows capital gains to be considered as income, is the net (long term minus short term) capital gain placed on the income beneficaries K1 as a long term capital gain or only the larger long term capital gain?

Re: How to report capital loss on K-1 from trust
Posted by: Retired Person, February 22, 2009 02:13AM
Edocosoft,

I should have also explained that the Trust, in question, does not allow corpus to be distributed. Only income can be distributed and only if the value of the Trust is greater then the corpus (corpus is defined as the orginal amount that funded the Trust).

If the K1 reported the largerlong term capital (gain rather then the net capiatal gain) the beneficiary would still only be distributed the net capital gain and the income distributed deduction would only show the net capital gain.

If this was the case the beneficiary would be paying tax on more money then was received (or had the right to receive) and the Trust would not be able to use or carry over the short term loss.






Re: How to report capital loss on K-1 from trust
Posted by: edcosoft, February 22, 2009 03:22AM
Get out your 1041 Schedule D and put your transactions on it. You net all gains against all losses to get a net gain or loss. AGAIN: You cannot distribute capital losses and you cannot divide losses from gains. They must ultimately be bunched all together as one gain or loss (which is carried forward as short term or long term). THEN, if the trust and State allows it, the net gain can be distributed as such, per Schedule D.

If you are asking these quetions you should not be a Trustee doing his own tax returns. Get a Pro, NOT H&R Block.

Ed, author of the 2012 IRS form 2210 AI calculator. www.edcosoft.com/qitc.html

Re: How to report capital loss on K-1 from trust
Posted by: Retired Person, February 22, 2009 07:35AM
Thanks for your quick response.

Re: How to report capital loss on K-1 from trust
Posted by: Retired Person, February 23, 2009 08:26AM
Ed,

I greatly appreciate your answer to my question and
was going to ignore your comment about using a "Pro"; however, I thought about it and felt you should know that a "Pro" prepared the Trust's 1041 tax return.

I asked the question because in a prior year's tax return the "Pro" tax accountant (CPA), who prepared the trust Tax return, did it the opposite way to your response.

If you read how my question was worded you will see that I thought it didn't make sense to only put the larger long term capital gain on the beneficiary's K1 (versus the net capital gain, considering both long term and short term gains/losses), but the "Pro" said that I was wrong. The "Pro" CPA did not work for H+R Block and was not inexpensive.

When we interviewed the "Pro" (prior to hiring him) we asked him if he prepared many 1041 Trust tax returns and he said he did. We found that many tax accountants (that we talked to) did not prepare 1041 tax returns. Most of them felt they were could not charge enough based on the time it would take them to study the Trust document and do the research to prepare the 1041 tax return. Some said they would do the work, but their minimum charge would be very expensive, versus the Trust's income. Perhaps we just talked to the wrong tax accountants.

On schedule D line 14, the "Pro" put the net short term capital loss under column 2 (the estate's column) and on line 15 put the net long term gain under column 1 (the beneficiaries column). Line 16 then showed a net long term capital gain for the beneficiary (column 1) and a short term capital loss for the trust (column 2). Column 3 was the net long term minus short term capital gain and was less then column 1.

The "Pro" also used the same long term capital gain under column 1 on the beneficiaries K1. The "Pro" correctly didn't put the short term loss on the K1.

Perhaps the "Pro" was misled by the 1041 line 14 column 1 instructions (page 33). Theses instructions (specifically for line 14 Net short term gain or loss) state that except in the final year, if the losses from the sale or exchange of capital assets are more then the gains all of the losses must be allocated to the estate or trust and none to the beneficiaries. The Pros interpretation of these instructions for line 14 was that the short term capital loss had to be placed under the estate or Trusts column and only the line 15 positive long term capital gain could be placed under the beneficiaries column.

Perhaps the "Pro" would have agreed with you (and me) if these instructions were better written to state that the gains or losses were total net gain or loss (considering both long term and short term capital gains/losses) or where placed under instructions for line 16 (which applies to the total net long term and short term capital gain or loss). Unfortunately, there are no line 16 instructions.

Since the instruction are under line 14 they can be interpreted to apply only to the individual short term capital gains and losses and by reference under line 15 to long term capital gains/losses).

It's a shame that the tax returns instructions are so poor that even two "Pros" give two different answers to the same simple question.

Thanks again for taking the time to answer my question.

The time you take to participate in this forum is greatly appreciated by me (a non "Pro") and I'm sure by many other non " Pros", who participate on this forum, and try to make sure that their tax return is correct; no matter who prepares the tax return.

Re: Vehicles in a trust?
Posted by: Drewremedy, February 23, 2009 12:26PM
Laymans take:

The law is quite clear that losses are not distributable except in final year.

Given that tax math `as to way rate structures kick in usually favors the distribution of all possible income it makes sense to distribute even into grey areas of state law--except for vary small amounts of income they may not be taxes at federal level if retained----I think its only about 300/yr per trust that fits in said box

Come back to your point about trust owns automobiles and thus the trust has expenses on said autos. That sounds like 1/2 a story---who uses said autos and is the use a profit motive for the trust? I doubt the trust uses the vehicles for itself?

Re: How to report capital loss on K-1 from trust
Posted by: edcosoft, February 23, 2009 09:55PM
I'll agree it's difficult to find anyone who does 1041's correctly. I have been a trustee and prepared 1041s for almost 50 years and this is the first year I have had a net capital loss. I can't find your referrence to page 33 instructions and some of the line numbers you quote don't match 2008 forms. But you missed, somewhere, instructions to net out gains and losses to line 14a total for the year. You can't give the losses to the beneficiary and the gains to the trust, or vise versa. It isn't that the instructions are wrong, it's that the "pros" didn't know how to allocate. There's a lot of accounting and Regulation information not put on the forms or their instructions so it's pretty easy to fill our the forms wrong. Regulations secton 1.643(a)-3 is referrenced in the instructions so it may be there.



Ed, author of the 2012 IRS form 2210 AI calculator. www.edcosoft.com/qitc.html



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