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Farm Income, Ordinary Gains, and Other Income for a Decedent, Estate, or Trust

When filing Form 1040 or Form 1041, you need to determine if the taxpayer (whether trust, estate or decedent) has earned any farm income, and calculate any gains and losses on the sale of business assets. Use Schedule F to report farm income/losses. Account for property depreciation when calculating ordinary gains and losses. Don’t forget to report “other income” that doesn’t fall under any of the categories on the returns.

Farm income or loss

If the decedent owned a farm, you’ll need to report any farm income or loss. Use Schedule F to determine what to report on line 6 of Form 1041 or line 18 of Form 1040. Form 1041 doesn’t have a separate Schedule F, so after you figure out how to prepare one, just transfer those skills from the decedent’s Form 1040 to the estate or trust’s Form 1041.

Ordinary gains, losses, and depreciation

The sale of any business property the decedent may have owned (from real estate owned as part of a business to any other property that had a business use), should be reported on Form 4797, Sale of Business Property.

Use Part I to report sales of property held long term by the taxpayer and Part II for short-term sales. Property acquired due to the decedent’s death constitutes an inheritance. It uses the date-of-death value for its acquisition cost and date of death for its acquisition date, and qualifies as a long-term holding, regardless of when the sale occurs.

Form 4797 needs a property description, acquisition and sale dates, and the taxpayer’s cost of acquisition. In addition to this information, if the property depreciated over time (where the property’s value is recovered over its useful economic life), you add the total amount of depreciation to the sale price in order to calculate the gain or loss.

Look at the decedent’s prior years’ income tax return to see what property he or she was depreciating. If there’s no sole proprietorship (Schedule C), rental property (Schedule E), or farm (Schedule F), there’s no depreciable property. If any of those schedules are attached to a prior return, consult a tax expert for assistance to determine how much, if any, of the depreciation taken must be recaptured.

Carry short-term gains or losses from line 17 of Form 4797 to Form 1041, line 7. If you’re filing the decedent’s Form 1040, follow the instructions for line 18a and b. Some losses may end up on Schedule A, Itemized Deductions. Gains and other losses not reported on Schedule A end up on Form 1040, line 14.

Long-term gains or losses take a detour through Schedule D (1041, line 10 or 1040, line 11) so that you can factor these long-term sales into your tax calculations.

On Form 4797, you also report casualty losses (losses from a theft, or a disaster), and gains or losses from installment sales (where proceeds from the sale are received over a period of years) and/or like-kind exchanges (where you exchange one piece of property for another, similar piece). Consult a professional when reporting these transactions.

Reporting other income

Report any income that doesn’t seem to fit in any of the other categories on line 8 of Form 1041 or Form 1041, line 21. Popular “other income” items on Form 1040 include fees and honoraria and jury duty pay. On Form 1041, the most common item will be taxable state income tax refunds. If the trust or estate is a party to a lawsuit, place any taxable awards received here.

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