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My mother passed away in October and my sister is in the process of settling everything.

My condolences on your loss.

Along with her house (which my sister is buying), she had assets in mutual funds, bonds and well as her IRA.

OK. All pretty ordinary things.

My sister has cashed out all the equities and has put them into an estate account at the bank. I know we will have to file her taxes for 2009 and we will probably have to pay some federal taxes.

You'll need to file two tax returns. Your mother's final return will cover all of her usual income and deduction until she passed away. Then you'll also need to file a fiduciary return for her estate. That would include all of the dividends on the equities after she passed away, plus any interest earned on the money held in the bank after the stocks were sold. And you will also report the sales of the stock on the fiduciary return.

My question is in regards to the equities that were sold after her death. Will the estate have to pay taxes on the capital gains?

Yes and no. Yes, the estate will have to report the sale of the stocks. But the cost basis of each stock is changed to the FMV as of the date of her death. So you may not have as much gain as you are thinking.

Her estate, house and equities is less than $500K.

So no Federal Estate Tax return is required. Your state may have different rules on the taxation of estates or inheritances.

The IRA is not a problem, we were all named as beneficiaries and we will each roll our shares into an inherited IRA.

Sounds good.

I rarely think that a Fiduciary return is a good DIY project. Most people file at most a couple of those during their lifetime. I'd suggest you get some professional assistance for that. There are some elections you may want to make, particularly the selection of a fiscal year for the estate and one concerning distributions during the first 45 or 60 days of the year.

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