How to Calculate the Real Estate Capital Gains in a Testamentary Trust

A testamentary trust comes into existence as a result of a person’s death. The trust’s purpose is holding property for the benefit of someone else. A trust reports capital gains using a Schedule D that is similar to the Schedule D for reporting gains on personal income tax returns. Determination of capital gain or loss for a trust is the same as for individuals. The calculation is the difference between sales proceeds and basis in the property. When someone dies, the normal tax rule defines basis as the fair market value of the property on the date of death.

Record a description of the sold property in Column (a) of Line 6 on Schedule D for Form 1041.

Enter the date of death in Column (b).

State the sale date of the property in Column (c).

Place in Column (d) the proceeds from sale of the property.

Report in Column (e) the trust’s basis in the property, which is normally the fair market value on the date of death for the trust’s creator.

Subtract Column (e) from Column (d) and record the gain or loss in Column (f).

References

• LegalZoom.com: Creating a Testamentary Trust
• IRS.gov: Instructions for Form 1041
• IRS.gov: Capital Gains and Losses
• IRS.gov: Publication 551
• IRS.gov: Instructions for Schedule D

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Tips

A property’s fair market value is listed on the federal estate tax return of the decedent. If no federal return was required, the basis is the property’s appraised value at the date of death for state inheritance taxes.

Deduction of a capital loss is prohibited for any sale by a trust to a beneficiary of the same trust.

A special rule excludes from tax up to $250,000 of gain from selling a house used by the decedent as a main home for two of the five years preceding death. See the IRS Instructions for Schedule D (Form 1041) for details on “Sale of Decedent's Main Home.”

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