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Discussion:QPRT/1231

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{{Advanced Tax Questions}}
{{Advanced Tax Questions}}
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[[Category: Trusts]]
{{ForumNewPost|UserID=Murphyqu03|Date=27 July 2009|Text=I have had some trouble finding definitive answers to my question:
{{ForumNewPost|UserID=Murphyqu03|Date=27 July 2009|Text=I have had some trouble finding definitive answers to my question:
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I guess I am having trouble with the difference between the income (a direct transaction between the grantor and the trust) and depreciation.  I know the income wouldn't be recognized because it ''is'' a transaction between the two, but the depreciation, which is ''not'' really a transaction between the two, would qualify under the grantor/trust transactions as well?}}
I guess I am having trouble with the difference between the income (a direct transaction between the grantor and the trust) and depreciation.  I know the income wouldn't be recognized because it ''is'' a transaction between the two, but the depreciation, which is ''not'' really a transaction between the two, would qualify under the grantor/trust transactions as well?}}
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{{ForumReplyPost|UserID=Dennis|Date=27 July 2009|Text=Depreciation is not a transaction, it is an allowance against income.  Depending on state law, an income distribution can be reduced by the depreciation allowance and the amount retained by corpus.  That would be a "transaction" but it effects only the amount of money changing hands and has no bearing on tax issues.  What you need to understand, is that the trust income must be distributed.  If not you have a reportable gift of future interest.}}
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{{ForumReplyPost|UserID=Dennis|Date=27 July 2009|Text=Depreciation is not a transaction, it is an allowance against income.  Depending on state law, an income distribution can be reduced by the depreciation allowance and the amount retained by corpus.  That would be a "transaction" but it affects only the amount of money changing hands and has no bearing on tax issues.  What you need to understand, is that the trust income must be distributed.  If not you have a reportable gift of future interest.}}

Latest revision as of 01:18, 11 April 2014

Discussion Forum Index --> Advanced Tax Questions --> QPRT/1231


Discussion Forum Index --> Tax Questions --> QPRT/1231

Murphyqu03 (talk|edits) said:

27 July 2009
I have had some trouble finding definitive answers to my question:

If someone has a QPRT, the term ends, the property remains in an intentionally defective trust (grantor), the grantor "rents" the property from the trust, no income is recognized and no depreciation is taken because of the grantor status, and the property is eventually sold, does the basis of the property need to be adjusted for "allowable" depreciation? Meaning is the property considered 1231 rental property and the basis needs to be adjusted?

I would assume that if the term of the trust ended and the property was rented to a third party the property would become 1231 and depreciation would need to be considered. I just don't know how it be treated because of the grantor status of the trust.

Thanks.

Dennis (talk|edits) said:

27 July 2009
Normally when a QPRT term ends the residence does not remain. It passes to the beneficiaries who can then rent it back. The purpose of the trust is to freeze value at date of transfer and remove the appreciation from grantor's estate. There is a rather aggressive strategy out there where the residence is "purchased" by donor (within two years of termination) and still held in trust (which would be grantor under §673 so that the gain would not be recognized.) This method will in effect step up the property value to fmv end of term removing even more from grantor's estate. Under scenario one, there is no retained interest. Beneficiaries own the property.

Murphyqu03 (talk|edits) said:

27 July 2009
The case I'm dealing with right now consists of the term of the QPRT ending, and the property remaining in a trust where the trust/beneficiaries are considered the owners of the property, but the trust is "defective," so for income tax purposes, the trust is treated as the same as the grantor. The grantor pays the trust rent, however the transaction is considered between the grantor and himself, so it is not reported. However, the depreciation is a different issue because it is not necessarily a "transaction" between the grantor and the trust, it is just a deduction.

I guess because of the "allowed or allowable" rule I would think the real issue boils down to whether, when a grantor pays rent to a grantor trust, is the trust/grantor ALLOWED to take a depreciation deduction?

Dennis (talk|edits) said:

27 July 2009
The type of trust you describe gives grantor only an income interest. If that is what you have, there is no recognized transaction and no depreciation allowed or allowable. There is, however, income for trust accounting purpose and money must change hands.

Murphyqu03 (talk|edits) said:

27 July 2009
Thanks for your help.

So this would be true even though the need to make sure rent is paid to the trust is to legitimize the transaction? The trust wouldn't "need" to take depreciation as well? or at least be "allowed" to take it?

I guess I am having trouble with the difference between the income (a direct transaction between the grantor and the trust) and depreciation. I know the income wouldn't be recognized because it is a transaction between the two, but the depreciation, which is not really a transaction between the two, would qualify under the grantor/trust transactions as well?

Dennis (talk|edits) said:

27 July 2009
Depreciation is not a transaction, it is an allowance against income. Depending on state law, an income distribution can be reduced by the depreciation allowance and the amount retained by corpus. That would be a "transaction" but it affects only the amount of money changing hands and has no bearing on tax issues. What you need to understand, is that the trust income must be distributed. If not you have a reportable gift of future interest.
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