A trust sells a property that is part rental & part resident

Technical topics regarding tax preparation.
#1
onehand  
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I have a client who has sold a house and bought another house. The houses are technically owned by a simple trust he set up and he is the only trustee. The house sold was used 2 thirds as a rental property and he lived in the other third of the house. So the trust can clearly use 1031advantage for the 2 thirds of the house. But they also want to use the primary residence exclusion for the residential part of the house.
What do people think about this? Is it possible?
 

#2
Nilodop  
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Is it a grantor trust? Or is it a true simple trust?

In other words, are you using "simple" in its everyday meaning or its technical tax meaning?
 

#3
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Assuming the grantor is not paying rent, at least that 1/3rd is a grantor trust. No 1031 on that part.
Steve
 

#4
onehand  
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I am using the word Trust in the technical tax meaning.
 

#5
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onehand wrote:I have a client who has sold a house and bought another house. The houses are technically owned by a simple trust he set up and he is the only trustee. The house sold was used 2 thirds as a rental property and he lived in the other third of the house. So the trust can clearly use 1031advantage for the 2 thirds of the house. But they also want to use the primary residence exclusion for the residential part of the house.
What do people think about this? Is it possible?

The principal residence exclusion can be used if the house is owned by a trust treated as a grantor trust. But the exclusion cannot be used by a trust that is taxed as a Simple Trust.
 

#6
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The reason I thought it was a simple trust was because on the 2021 1041 return, the "simple " box was checked. However, I think it meets this criteria: "A grantor trust is a trust in which the individual who creates the trust is the owner of the assets and property for income and estate tax purposes." How can I determine what kind of trust it must be treated as?
 

#7
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onehand wrote: How can I determine what kind of trust it must be treated as?

For grantor trust purposes, that requires a careful reading of the trust document, to see if any of the trust provisions fall under Sections 671-679 making it a grantor trust for income tax purposes. It is not always easy to discern.
 

#8
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Where do I find "the trust provisions fall under Sections 671-679" ?
 

#9
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onehand wrote:Where do I find "the trust provisions fall under Sections 671-679" ?


The code sections explain which specific powers and interests contained within a trust would make that trust a grantor trust.

The language in the trust document will determine if the trust contains any of the relevant powers and/or interests.
 

#10
onehand  
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Forgive my ignorance, but I still don't know where you are looking for this information.
 

#11
sjrcpa  
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Read the Code Sections.
Then read the trust agreement to see if it contains any of those provisions.
It will likely not say this is grantor trust under IRC Section 671 because... (although occasionally the atty will use language like that)
 

#12
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I think I understand now about the trust, here's another question. If I determine that the primary residence exclusion can be taken, do I take it on the 1041 or do I take on the Trustee's 1040?
 

#13
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onehand wrote:Where do I find "the trust provisions fall under Sections 671-679" ?

onehand wrote:Forgive my ignorance, but I still don't know where you are looking for this information.

Pardon me, but if you don’t know what sections 671-679 refer to and don’t know where to find them, then perhaps you shouldn’t be advising a client regarding trust taxation, at least not until you have taken a course on the taxation of trusts.
 

#14
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Point taken
 

#15
onehand  
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That said, it is a friend of mine who asked me to advise her on this situation. Essentially they just want to know how they can take the primary residence exclusion. It's true that estate taxation is not my expertise, but I'm an excellent tax preparer and I know how to look things up, but appreciate some direction about where to look.
 

#16
onehand  
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I found the section 671 - 679 by the way.
 

#17
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onehand wrote:That said, it is a friend of mine who asked me to advise her on this situation. Essentially they just want to know how they can take the primary residence exclusion. It's true that estate taxation is not my expertise, but I'm an excellent tax preparer and I know how to look things up, but appreciate some direction about where to look.

Okay, if you really want to tackle this, the first test is whether the trust is treated as a grantor trust. Secs. 671-679 along with a reading of the trust instrument will tell you the answer.

If it’s treated as a grantor trust, then the next question is whether a section 1031 exchange occurred. You said that the trust “sold a house and bought another house.” A sale followed by a purchase isn’t an exchange. There are rules in section 1031 and Treas. Reg. §1.1031(k)-1 that must be followed.

The next question is how the principal residence exclusion applies when section 1031 also applies. Rev. Proc. 2005-14. 2005-7 I.R.B. 528 deals with this situation and has several examples.

If the trust is a regular trust and not a grantor trust, then the principal residence exclusion doesn’t apply because a trust can’t have a principal residence. But section 1031 might apply to the two-thirds of the relinquished property that was rental property.
 

#18
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Thank you.
 


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