![]() ![]() With this question, we will concentrate our answer on real property held by a trust or estate which is not part of a business or investment activity such as a rental property, farm property, or other business property. Question 2: What expenses can be deducted for real property held by a trust or estate? Therefore, practitioners may want to revisit returns filed for the most recent TCJA years (20 at this point) to determine if taxpayers could benefit from amending those returns. However, estates, trusts, and beneficiaries may rely on the proposed regulations for tax years 2018 and later before the date the regulations are published as final. Once final, the proposed regulations will apply to tax years beginning after the date they are published as final (as of July 24, 2020, they are not yet final although the comment period ended on June 25). When a Schedule K-1 is issued to a beneficiary, it indicates the type and nature of the excess deduction being passed through so the beneficiary can treat the excess deduction in the same manner. The deductions in the hands of the beneficiary are treated the same as they were by the trust or estate (Example: a long term capital loss of a trust remains a long term capital loss to the beneficiary). The proposed regulations also give guidance on determining how beneficiaries treat excess deductions. ![]() The distribution deduction for estates or trusts which accumulate income.The distribution deduction for trusts which distribute income, and.The personal exemption of an estate or trust.Fees paid and expenses reimbursed (such as travel) for a personal representative or fiduciary who is administering the trust or estate.Investment advisory fees specific to the estate or trust.Management and maintenance of property expenses (discussed below).Tax preparation fees for estate and trust tax returns (1041).The administrative expenses of an estate or trust that would not have been incurred if the trust or estate didn’t exist.The proposed regulations put into motion the “promise” of Notice 2018-61’s treatment and makes the following clarifications as to trust and estate expenses which are not miscellaneous expenses under IRC §67(e) and are therefore deductible: Notice 2018-61 expressed the intent of the IRS to address the treatment of these deductions as well. However, now thanks to TCJA, these are not deductible for tax years 2018 through 2025. Typically, the beneficiary treats excess deductions as miscellaneous itemized deductions. ![]() If there are excess deductions when a trust or estate is terminated, those deductions are passed through to the beneficiary. In other words, expenses incurred only because there is a trust or estate are deductible and are not miscellaneous itemized deductions, rendered nondeductible by TCJA. The notice stated that regulations would provide clarity regarding the deductions for expenses which are administrative expenses of an estate or trust and more importantly, would not have been incurred if the estate or trust did not exist, are still deductible for an estate or trust. It explicitly disallowed miscellaneous itemized deductions by individuals and, therefore, by inference, estates, and trusts (filing 1041 income tax returns) for the TCJA years 2018 through 2025.Īfter the enactment of TCJA, the IRS issued Notice 2018-61 in July 2018, which announced that proposed regulations would be coming regarding the effect of §67(g) on estates and trusts to deduct certain expenses. This regulation was part of the Tax Cuts and Jobs Act (TCJA). IRC §67(g): No miscellaneous itemized deductions allowed under TCJA The regulations also address how deductions are allocated and treated by a beneficiary after a trust or estate terminates (excess deductions).īefore we explain the impact of these regulations, we need to do a little background work. The proposed regulations seek to clarify that certain deductions are allowed by an estate or trust because they are not miscellaneous itemized deductions. Question 1: What deductions are allowed for a trust or estate? The answer revolves around another question are the deductions specific to the administration of the trust or estate, or are the expenses miscellaneous itemized deductions?įortunately, we have recently released IRS regulations that address the deductibility of trust or estate administrative expenses and excess deductions on the termination of a trust or estate. In particular, we want to address some of the most frequently asked questions. We’re coming to you today as a follow up to our Summer 2020 in-depth online seminar, Expand Your Tax Practice: Capitalize on the Trust Explosion! Allowable Deductions for Trusts “I don’t always ask questions about trusts or estates, but when I do, I ask the Tax School…” ![]()
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