Can a Loss Be Taken by a Trust Beneficiary on Sale of Trust Property?

by Rena Dietrich ; Updated July 27, 2017
Trustees track all expenses associated with the sale of property, including listing fees and realtor commissions.

Beneficiaries can sustain losses when a property placed in a trust is sold. Trust property is subject to fluctuations in the real estate market like any other property. It is subject to capital gains and losses, and those must be reported to the Internal Revenue Service upon sale of the property. The trust beneficiary is not responsible for tracking and calculating losses; this is the trustee's duty.

Tax Implications

A grantor is the individual who places property in the trust. A trustee manages the property held by the trust, and the beneficiaries of the trust receive the benefits or incur the losses. If the trust was in existence before the grantor's death and it generated income through rent, the trustee must file a tax return. Trusts have tax returns of their own, because estates and trusts are two separate entities. Taxes are paid out of the trust. Anything in the trust on the date of the grantor's death belongs to the trust.

Sale of Trust Property

Selling property after it is placed in a trust isn't much different than selling other types of property. The most common method is to sell it directly from the trust. In this situation, the trustee is the seller. In some circumstances, the property may have to be transferred out of the trust to the grantor or the beneficiaries in order to sell it. After the grantor, if alive, or a beneficiary owns the property, he can sell it the same way he would sell normal property.

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Gains or Losses

When the property is sold while in the trust, the trustee reports any capital gains or losses on the trust's tax return. If it is sold during the grantor's lifetime, the trustee will send a copy to the grantor, with information on any taxes that must be paid out of the estate. Taxes are only due if there was a capital gain. If it is sold after the grantor is no longer alive, the trustee will send a copy of the tax return to the beneficiaries. The trustee is required to account for all money entering and leaving the trust.

Considerations

Reporting a loss on an income tax return can help to offset taxes owed due to capital gains. A capital loss occurs when the property is sold for less than the purchase price. A gain occurs when a property is sold for more than the purchase price. Expenses from sale of the trust property, such as real estate commissions, can be added to the loss. The drawback is that deductions for losses are limited to capital gains, and only $3,000 of losses in excess of gains can be written off each year. Once the $3,000 is deducted, the remainder of the capital loss can be carried forward to future years in which there are capital gains.

About the Author

Rena Dietrich is a freelance writer who has been writing about topics in the business field since 1997. Her work has appeared in publications ranging from accounting textbooks to financial newsletters. Dietrich received her Master of Business Adminstration from Governor's State University.

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