In my experience, distributions of principal from the trust corpus aren't a taxable event. Here are my facts: Trustor died in Feb. 2018. Left in trust a condo in Hawaii to her three adult children. They made it into a rental and rented it out from March 2018 - November 2018. The trust filed a 1041 and its Hawaii equivalent in 2018, showing the rental income and expenses, (incl depreciation of around $8,000...) The 2018, 1041 showed a net loss and there was no reportable income on the K-1's for the 3 beneficiaries from anything else. It was just the rental property on the return. Since Nov 2018 there has been no rental activity. The condo was no longer in service as a rental.
Now, in 2019, it's final return time for this trust. The beneficiaries went to an atty and he deeded the condo out of the trust and into the three beneficiaries, one third each, but the trust didn't sell it to them. It was their inheritance. There was no income in the trust during 2019. Do I somehow have to show the property leaving the trust and going to the beneficiaries? Can I just file a final return and show no activity except the lawyer's fees? The condo has an FMV of $906,000 at the date of death. What about that depreciation that was taken? After having the property deeded to them, 2 of the beneficiaries sold their interests to the 3rd beneficiary. He now owns it all. I guess I should make him aware of the depreciation that was taken so it can be recaptured if he sells the property? Am I thinking straight here? Nothing to put on the Final 1041?