real estate depreciation within a trust

[Taxing Matters]

That statement says time is the reason they depreciate.

No, it says that time is a factor in the depreciation. I never said that time is the only factor. And I don't think you really contend that time is NOT a factor in their condition, do you? Indeed, you say:

When age is mentioned it is always accompanied with things referring to using age to speculate on condition or possibility of building materials used or other matters that age suggests may be a problem or even benefit but I haven’t found one that places a value simply due to age.

That acknowledges what I think is evident: time is a factor in the condition of buildings, just as it is with anything else we create. The effect of time will vary substantially depending on exactly what that thing is, of course, as I said earlier. This is why the depreciation rules treat different classes of assets differently.

I don't really understand the push back on having depreciation for buildings or why you and TrustUser seem to regard buildings as somehow fundamentally different from the other things humans create. Neither of you seem to dispute that a building will waste away over time unless money and/or effort is spent to maintain that building, just like any other asset. It is that that principle that it will waste away unless that cost to maintain it is incurred that underlies depreciation. The fact that people do spend the money and effort to maintain buildings so that their values do not plummet the same way cars do does not change the fact that without the money and effort spent to maintain it the building will deteriorate and lose value over time. Do you disagree with that?

 

[justalayman]

And I don't think you really contend that time is NOT a factor in their condition, do you?

Time is a factor only because it takes time for a building to degrade but the age is not what causes the depreciation. It is the degradation

That is in contrast to your claim that time is a factor in valuation.

Time (age) itself is not used to establish value.

The entire time you keep bringing up the requirement to maintain the building for it to retain its value, you are supporting my position that it is condition and not age that causes depreciation. Along with that, age does not necessarily reflect condition which again proves my point that age is not the basis for depreciation. Just because they are often coincidental does not make them both responsible for the depreciation of the building.

 

[TrustUser]

hi just,

i think i have already posted tons of info, showing them to be using incorrect logic. tm keeps talking about degradation if things are not kept up. i mentioned that in the very beginning. we get to expense things as we fix them. once fixed, these buildings are sometimes better than they once were. their value certainly does not go down. it is not fair that a property owner gets to both expense cash outlays, and add depreciation to it.

it is all a game. and many people benefit. the bigwigs who own a lot of real estate. the 1031 guys. the tax accountants and consultants.

the game is simple, but it takes someone with some wealth to get into the game. you buy a property. you then depreciate it, many times at even accelerated rates. you then 1031 exchange it, to defer having to pay capital gains tax. you then die, with your beneficiaries inheriting a property worth many more times than what was originally paid AT THE NEW STEPPED-UP BASIS. and this is not just that the land is worth more. the building is also worth more.

put very simply, it is a huge tax scam that the wealthy have enacted for themselves. the other side has absolutely no way to counteract what i am saying. in a logical debate, i would make them look absolutely ridiculous.

now can we get back to answering a very simple question of mine. i live in california. i have a very simple trust that has the net income being paid out to the beneficiaries. do i claim depreciation expense, and then deduct it from the net income, before i distribute it ? i am not going to no dang trust lawyer, pay him a gazillion dollars an hour, to get an answer to a very simple and basic question. if no one here knows the answer, i will find another site or web site that can tell me.

i figured someone here would know the answer to what should be an extremely simple question to someone with the least bit of experience in it.

 

[Taxing Matters]

Time is a factor only because it takes time for a building to degrade but the age is not what causes the depreciation. It is the degradation

Then you are splitting hairs. You say that time is a factor in creating the degradation and then say it is the degradation that causes the depreciation. As time is factor (not the sole factor, but certainly a factor) in causing degradation and degradation is what causes depreciation it follows that time is a factor in depreciation.

That is in contrast to your claim that time is a factor in valuation.

So, no, it does indeed support my claim.

Time (age) itself is not used to establish value.

Nor did I say that time alone does that. Please not mischaracterize what I have said. I explained before that time is a factor beause assets waste over time if not maintained, a point you do not seem to dispute, aside from the apparent hair splitting noted above. Perhaps our difference on this is merely semantics. In any event, I have explained the rationale for the depreciation expense and why buildings are not somehow different from any other thing humans make. At this point I'd simply be repeating myself over again to address this further with you, and I'm not going to keep doing that. So we may have to agree to disagree on this.

 

[Taxing Matters]

the game is simple, but it takes someone with some wealth to get into the game. you buy a property. you then depreciate it, many times at even accelerated rates. you then 1031 exchange it, to defer having to pay capital gains tax. you then die, with your beneficiaries inheriting a property worth many more times than what was originally paid AT THE NEW STEPPED-UP BASIS. and this is not just that the land is worth more. the building is also worth more.

The villian in that game is the step up in basis, not the depreciation. There is really no logic to granting the step up in basis at death. If you give the property away during life you get no step up in basis. But if you if give away after death, there is a step up in basis. There is no reason why death should suddenly boost the basis of the property. After all, the death of the owner has no connection with valuation of the property. But despite not having much logic to it, the rule remains because it is very popular and makes determination of basis easier for the heirs in a lot of circumstances.

now can we get back to answering a very simple question of mine. i live in california. i have a very simple trust that has the net income being paid out to the beneficiaries. do i claim depreciation expense, and then deduct it from the net income, before i distribute it ?

Simple questions do not always have simple answers. The answer depends in part on exactly what the trust instrument says. But if I assume that the trust does not address it in any way, then there seems to be a pretty simple answer to it. Under the applicable California statute, the trustee of the trust may do that but is not required to do it. In short, it is up to the trustee. What the relevant California statute says is the following:

(a) For purposes of this section, “depreciation” means a reduction in value due to wear, tear, decay, corrosion, or gradual obsolescence of a fixed asset having a useful life of more than one year.

(b) A trustee may transfer from income to principal a reasonable amount of the net cash receipts from a principal asset that is subject to depreciation, under generally accepted accounting principles, but may not transfer any amount for depreciation under this section in any of the following circumstances:

(1) As to the portion of real property used or available for use by a beneficiary as a residence or of tangible personal property held or made available for the personal use or enjoyment of a beneficiary.​

(2) During the administration of a decedent's estate.

(3) If the trustee is accounting under Section 16352 for the business or activity in which the asset is used.​

(c) An amount transferred from income to principal need not be held as a separate fund.

Cal. Prob. Code § 16372(underlining added).

Note that this rule just applies to the accounting for trust administration purposes. The trust could still take the depreciation deduction on the trust tax returns whether or not the trustee charges depreciation against the income for determining what distribution the income beneficiaries get.

 

[TrustUser]

thank you tm,

then i plan to expense the depreciation on the trust return, and then use the calculated net profit as my distribution amount.

since i prefer not to depreciate at all, i will just use a conservative 30-year straight line method.

we are not talking huge amounts of monies, so i want to keep it as simple as possible.

you may or may not know the following, but i am curious - is there a step-up in basis for real estate in an irrevocable trust, when a new class of beneficiaries comes in ? i.e. the next generation ?

 

[Taxing Matters]

you may or may not know the following, but i am curious - is there a step-up in basis for real estate in an irrevocable trust, when a new class of beneficiaries comes in ? i.e. the next generation ?

No, there is no step up in basis for the new class of beneficiaries. The trust's basis in the property remains the same.

 

[LdiJ]

Alerts

that has got to be one of the craziest reasons i have heard for supporting funny money.

have you ever heard of cash reserves ?

Cash reserves is the whole point I was making. Depreciation allows you to have cash reserves should the trust otherwise require all income to be distributed.

Its clear that you do not understand much about accounting and that is ok, you have no particular reason to know much about accounting. However, that also means that you should not take a strong position about an accounting matter because you don't understand the why of it, even though it has been explained very thoroughly to you by Taxing Matters.

 

[LdiJ]

thank you tm,

then i plan to expense the depreciation on the trust return, and then use the calculated net profit as my distribution amount.

since i prefer not to depreciate at all, i will just use a conservative 30-year straight line method.

we are not talking huge amounts of monies, so i want to keep it as simple as possible.

you may or may not know the following, but i am curious - is there a step-up in basis for real estate in an irrevocable trust, when a new class of beneficiaries comes in ? i.e. the next generation ?

If its in use as a residential rental it must be 27.5 years. If its in use as a commercial rental, it must be 40 years. There is no 30 year option.

 

[TrustUser]

ldij, okay, i guess i will use a 27.5 year option. but puh-leeeze, i understand a great deal about accounting. it was you who did not. which is why i pointed out cash reserves to you.

 

[Taxing Matters]

If its in use as a residential rental it must be 27.5 years. If its in use as a commercial rental, it must be 40 years. There is no 30 year option.

Those are the rules for tax depreciation. The rules for depreciation for the purposes of administering the trust may well be different.

 

[LdiJ]

Those are the rules for tax depreciation. The rules for depreciation for the purposes of administering the trust may well be different.

Ok, but he was talking about the tax return for the trust.

 

[Taxing Matters]

Ok, but he was talking about the tax return for the trust.

Just want to keep things straight in the thread is all, as it can easily get confusing what set of rules are being discussed.

 

[TrustUser]

it used to be that 30-year straight line was the most common form of depreciation. now that does not seem to exist any more.

i am pretty sure there are multiple options within the 27.5 time length. i will choose the option that allows me to have the least amount of depreciation expense. thanks for the clarification - at least now i have a definite plan of attack.

 

[LdiJ]

it used to be that 30-year straight line was the most common form of depreciation. now that does not seem to exist any more.

i am pretty sure there are multiple options within the 27.5 time length. i will choose the option that allows me to have the least amount of depreciation expense. thanks for the clarification - at least now i have a definite plan of attack.

That would be straight line 27.5 and opting out of any bonus depreciation if it happens to be available.