Hi, I think I have a simple question about how to report income/deductions on an estate Form 1041 K-1.

Year 2005 was the first and last year for an estate.  Deceased died intestate, all estate assets inherited by parents.

Income:

$100,000  401(k) distributed to estate (401k had no designated beneficiaries)

Expense:

$5,000  probate attorney fees

$5,000  interest expense (home interest, sold home for $0 gain, never rented or used after parents)

Primary question I have is how do you report the income/deductions?

Method #1:  Report a $90,000 net income amount in Box 5 Other Portfolio and Nonbusiness Income.  Then the parents report $90,000 on their Form 1040 Schedule E.

Method #2:   Report a $100,000 income amount in Box 5 Other Portfolio and Nonbusiness Income and report $10,000 in Box 14 Other Information.  Then the parents report $100,000 on their Form 1040 Schedule E, and report the $10,000 deductions on the appropriate lines within Form 1040 Schedule A.

So which method is correct?

John