Mother contracted to build a house in New York State in 2005 and paid $170,000. Put it in an IRREVOCABLE TRUST when she moved in with a life estate. She paid all the taxes and maintained the property while she lived there. She died in 2016 and the house sold for $139,500 in 2017. There was an independent paid-for appraisal that put the value of the house at the sale price. The three beneficiaries of the trust equally divided the money from the sale. Since it was an irrevocable trust, there is no stepped up basis for the house. Is it true that each of the beneficiaries should receive a K-1 for the estate this year that would indicate a capital loss they can claim on future taxes up to $3,000. per year?

Mother contracted to build a house in New York State in 2005 and paid $170,000. Put it in an IRREVOCABLE TRUST when she moved in with a life estate.She paid all the taxes and maintained the property while she lived there. She died in 2016 and the house sold for $139,500 in 2017. There was an independent paid-for appraisal that put the value of the house at the sale price. The three beneficiaries of the trust equally divided the money from the sale. Since it was an irrevocable trust, there is no stepped up basis for the house. ================>> When a living person establishes an irrevocable trust, the property transfer is a GIFT. The trust's basis is donor's/your mother with the usual adjustments and limits. The subsequent death of the grantor is irrelevant, so there will be no step-up whether the property is held or distributed.


Is it true that each of the beneficiaries should receive a K-1 for the estate this year that would indicate a capital loss they can claim on future taxes up to $3,000. per year?========> A loss on the sale of a personal residence is considered a nondeductible personal expense. You can only deduct losses on the sale of property used for business or investment purposes. An estate cannot deduct a loss on the sale of real estate if the property is deemed under state law to pass directly to the beneficiaries. In order to deduct a loss on the sale of an inherited residence, the estate / beneficiaries must show the the property was held for income or for investment, and not for personal use. What will happen is that the capital loss (if qualified) will show on the K-1s that are distributed to the beneficiaries. Those K-1s are then reported on the respective individual income tax returns.