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If you owned and lived in the home for a total of two of the five years before the sale, then up to $250,000 of profit is tax-free (or up to $500,000 if you are married and file a joint return). If your profit exceeds the $250,000 or $500,000 limit, the excess is typically reported as a capital gain on Schedule D.
The costs of selling the property is deductible from the amount realized. Then you would subtract the basis of the property, which would be a step-up in basis to fair market value as of the date of death. Any gain or loss on the sale would be reportable on the estates Form 1041 income tax return.
To report a gain or loss from sale on a fiduciary return: Go to Screen 22, Dispositions. Enter the Description of Property. Enter the Date Acquired. Enter the Date Sold. Enter the Sales Price. Enter the Cost Basis. Complete any other applicable entries.
On the state level, Californias Franchise Tax Board (FTB) taxes all capital gains as regular income.
Not every estate or trust is required to file Form 1041 for the income it earns. No return is necessary if the estate has no income-producing assets or its annual gross income (AGI) is less than $600.

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If the estate generates more than $600 in annual gross income, you are required to file Form 1041, U.S. Income Tax Return for Estates and Trusts. An estate may also need to pay quarterly estimated taxes. See Form 1041 instructions for information on when to file quarterly estimated taxes.
It shows the taxpayers share of income as the beneficiary of an estate or trust. The electronic/magnetic media filing of Forms 1041 includes returns filed on magnetic media (magnetic tape or floppy diskette) or electronically.

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