Reporting Rental Income

What is the name of your state? FL
I am the trustee of a Trust left by my father, which contains a condo (it is titled to the Trust). He created a Life Estate to a friend of his. I have a remainder interest in the property. Starting in January, 2003, the friend moved out and the place is being rented. The tenants send me the check each month, and I pay all the expenses (association fees, taxes, repairs, etc.).

Should I file the Rental Income/Expenses (Schedule E) on my indiviudal return, or should it be filed with Trust?

Since you receive the funds in the name of the trust (at least I hope you do) and the left over funds are then deposited in the trust (are they?) then you file the returns for the trust listing the condo as an asset.

Actually the monthly checks are made out to me and deposited into my personal checking account, which is also used to pay the condo expenses. I signed the lease agreement as trustee. The expenses exceed the income. I am paying the difference. If we reach the point where income exceeds expenses, the difference will be accumulated for condo improvements (carpeting, appliances, etc.).

My father's friend is responsible for all condo expenses. To accomodate her, we agreed to have the tenants send the rent directly to me. She wants to live in another state, and then return in a few years.

Can I still assume the Schedule E is filed with the Trust?

[abezon]

The rental income must be reported on the trust return. The trust will give the life estate beneficiary a Schedule K-1. She will report the gross income on her Schedule E (page 2) & claim all expenses as passive income expenses. Since she is responsible for the expenses, she gets to claim them all, whether you pay them or not. After depreciation, she will probably have a tax loss. If there is ever a positive cash flow, any profits are the property of your father's friend.

A word about your handling of the money -- it's lousy. You are a trustee comingling trust funds with personal funds. This is a horrible idea & could get you sued for lots of $$. It's even a crime in some states. Create a separate bank account in the trust's name & use it to deposit the rent & pay expenses. Even better -- use a separate bank entirely. If there is a shortfall, have the life estate beneficiary transfer money into the rental account, then pay the expenses. You also need a separate bank account for the security deposit. (State law requires landlords to deposit the tenant's security deposit into a separate savings account.)

Furthermore, your plan to use any profits to improve the condo creates a conflict of interest. As the trustee, it is you duty to protect the income beneficiary's income & the residual beneficiary's remainder interest. As the property manager, your duty is to maximize the life estate owner's income (i.e., defer maintenance). As the remainder beneficiary, you want the condo to come to you in the best possible condition (do maintenance properly & make improvements). See the problem? If you install a new kitchen, it benefits you, not her. That's illegal.

You need a clear, written agreement with the life estate beneficiary as to what maintenance will be done, who will do it, & how it will be paid. Do not make any improvements without prior written consent after full disclosure. (Disclose that the improvement won't benefit the life estate person very much but will benefit you more. If she approves in writing, you can go ahead.)

Finally, I *strongly* urge you to visit a professional tax preparer with experience in doing trust returns to make sure everything is reported properly. As trustee, you can be held personally liable for any faulty tax returns.

Thanks Abe, I was about to fall out of my chair when I read his reply.

I just didn't want to type what I was thinking so I'm glad I took my time and you came alonG

[HomeGuru]

I trust you did what you could hexy.

Thanks for answering the tax question and alerting me to possible problems. It's obvious I have no idea how this stuff is supposed to work. I'm just trying to help her out, keep the tenants happy, and preserve the property.

Anyone want to buy my remainder interest?