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But more generally, the income taxes will follow the money. If the property is sold at a gain and the proceeds are distributed to the beneficiaries in the same year (or shortly after the end of the year if the fiduciary makes the proper election) then the beneficiaries will pay the income tax. The estate itself pays the income tax only if it holds on to the sale proceeds and doesn't distribute them. (And that's usually a bad idea, as the estate will usually pay more income tax than the beneficiaries would.)
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Yes, you make a valid point. specifically, if the house is sold and all of hte remaining estate assets are distributed out to the beneficiaries such that the estate can file a final year return, then I agree, the gains/losses would get distributed out to them and they would report on their 1040's. However, if its not a final year return, then the gain/losses would stay in the estate and be included in the estates computation of taxable income. Generally speaking, Capital gains and losses are usually retained in the estate or trust because they are considered "corpus"..i.e. principle. Other types of income like interest and dividends are frequently distributed out to the benes to the extend of distributions.

Bottom line: need to understand the estate documents and should check w/ executor/attorneys/cpa's who are familiar with this particular situation.
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