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

A trust is a legal entity that holds assets for beneficiaries. Although trusts can be used to hold assets for your own benefit while you’re alive, they’re most often used for passing assets on to beneficiaries when you die. It's important to consider what happens when a trust sells property.

Exploring Trust Basics

The person setting up the trust, the trustor, specifies what must be done before the trust’s assets are distributed to its beneficiaries. The trustee, a third party chosen by the trustor, controls the assets and distributes them as the trustor has directed. Trustees are usually lawyers, banks or trusted family members.Any property from cash, stocks and bonds to cars, houses and land can be put in a trust. Trusts are a popular way of passing assets to beneficiaries because they can have tax benefits for both the trustor and the beneficiary. Trusts may also help beneficiaries avoid the expensive and time-consuming process of probate.

Assessing Trust Responsibility

Once property or other assets are put into a trust they belong to the trust. Any expenses incurred by assets in the trust, like upkeep of a home or land, are paid for by the trust. Similarly, any profits made by selling assets in the trust belong to the trust. The appointed trustee is responsible for acting in the best interests of the trustor and following the trustor’s instructions for managing and distributing the assets. In carrying out his duties, and depending on the trustor’s instructions, the trustee may sell some or all of the property in the trust.

Property Sold by the Trust

When property is sold directly from a trust, the trust benefits from any profit made by the sale. If property is sold for less than its basis, the trust incurs the loss. A property’s basis is what was paid for the property, what’s owed on it and any sales tax or other costs related to its purchase. If the trustee sells property at a loss, beneficiaries will probably not be too happy about it, but for tax purposes, it’s not the beneficiaries’ loss to report. It’s the trust’s.

Property Sold by the Beneficiary

Once property in a trust has been distributed, it becomes the beneficiaries’ capital asset and the definition of basis changes. At this point, basis is usually the fair market value of the property on the date the trustor died or six months after. The trustee usually makes the determination on which definition of basis is used depending mostly on whether the trust's assets declined in value after the trustor’s death.Now that the beneficiary owns the property, if it's sold for more than its basis, the beneficiary has a taxable gain. These gains must be included as income when tax time comes. If the property sells for less than its basis, a loss may be claimable, but there are limits. Loss limits for tax years 2017 and 2018 are the same: $3,000 for an individual and $1,500 if you’re married and filing separately. If your loss is more than the limit, the IRS allows you to carry the excess over to the next year’s tax return.

Get Good Advice

The tax consequences of selling inherited property are complex. For example, how long you hold the property before you sell it can have a bearing on claiming a loss on its sale. Your best bet is to consult with a tax professional or estate planning attorney and the earlier the better.