Inclusion of Expenses in Cost Basis of Decedents House

[Del Gran]

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.

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[removep...@yahoo.com]

>> 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.

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?

>> 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.

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.

>> 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)).

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.

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

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

> Your accountant should look for court cases on the subject for the answer.

Out of curiosity where would one look?

[Del Gran]

On May 10, 5:50 pm, "D. Stussy" <spam+newsgro...@bde-arc.ampr.org>
wrote:

> > 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).

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".

[removep...@yahoo.com]

On Thursday, May 10, 2012 5:53:00 PM UTC-7, Del Gran wrote:

> > > 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).


> Trust paid the Real Estate Taxes and all the other expenses. Trust

> has asssets but, with current bank interest, interest is negligible 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.

I'm not sure if IRC 266 lets you capitalize maintenance.

> 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.

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.

> 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".

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