Question

The adam jones living trust is a nongrantor trust that was created upon the death of adam jones. shortly after its creation, the trust sold adam's main home. even though the home had increased in value between the time adam purchased it and the date of sale, the trust reported a capital loss on its tax return. which of the following may explain why?

A. the sale of home exclusion reduced the amount realized to zero. selling expenses further reduced this to a negative amount.
B. capital gains from the sale were allocated to trust principal for trust accounting purposes. expenses of sale reduced trust income.
C. gains from the sale were reported on adam's final form 1040.
D. the house's adjusted basis was increased to its fair market value as of the date of adam's death. total gain (loss) was then reduced by selling expenses.

Answer 1

The capital loss reported by a nongrantor trust could result from gains on the sale of the decedent's property being reported on the decedent's final Form 1040, reflecting a stepped-up basis that reduces the taxable gain to the trust.

Step-by-step explanation:

The reported capital loss on the tax return for the Adam Jones Living Trust, which is a nongrantor trust, may occur if the gains from the sale of Adam's main home were reported on Adam's final Form 1040. When an individual passes away, certain assets are transferred to their trust, which becomes irrevocable.

In this case, the main home's value appreciation is likely to have been 'stepped up' to its fair market value at the time of Adam's death, which can result in a sale at a price that appears as a loss from the trust's perspective but a gain on the decedent's final tax return. This discrepancy is because capital gains taxes due upon death are typically handled on the individual's final income tax return, distinct from the taxation of the trust.