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Can you explain further?

The estate will calculate its taxable income and deductions. In the final year of the estate, all of those items will flow through to the beneficiaries on a K-1. The estate itself will not pay any tax in its final year.

The estate will have other income (dividends, interest, etc), and I had assumed that the expenses for the real estate property (interest, upkeep, etc) would offset that income in the estate, and the beneficiaries would not see it.

That assumption is not correct. The different kinds of income will retain their character as they are passed through to the beneficiaries. The K-1 will report the interest, dividends, and rental income or loss as separate items.

Also, the estate cannot claim a depreciation deduction, so how will the beneficiaries get that?

That is also not correct. The estate can certainly claim depreciation on business assets. To the extent that the depreciation exceeds the net of the other rental income and expenses, it will get passed through to the beneficiaries in the final year of the estate.

--Peter
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