Roll an Estate’s Pension Plan or IRA to the Heirs
What Are Excise and Local Income Taxes for Estates and Trusts?
How to Deduct Interest and Taxes for a Decedent, Estate, or Trust

Calculate Decedent, Estate, or Trust Business Income and Capital Gains and Losses

In order to file Form 1040 or Form 1041, you will need to determine how much business income, if any, the taxpayer (whether trust, estate or decedent) earned, and calculate capital gains and losses. The way you report business income depends on whether the business in question was owned wholly or in part. Use the information on Forms 1099-B and 1099-S to help you calculate capital gains and losses.

Business income: Sole proprietorship vs. partnership

Business income is income received from operating a business. If the decedent operated a business as a sole proprietor (he or she was the sole owner and declared the business income on Schedule C of Form 1040), you probably have to prepare a Schedule C. After you complete Schedule C, place the total on line 3 of Form 1041, or line 12 of Form 1040.

If income is received from a Subchapter S corporation or a partnership, you receive a Schedule K-1 from that entity’s income tax return, reporting all the types of income you need to include on either the decedent’s Form 1040 or the trust or estate’s Form 1041.

Only include on the business income lines of these tax returns amounts labeled as ordinary income on Schedule K-1.

Income earned from a sole proprietorship declared on Form 1040 is still subject to a self-employment tax. Don’t forget to prepare and include Schedule SE with the decedent’s final Form 1040. After the business is operating under the estate’s ownership, self-employment tax disappears.

Calculating capital gains and losses

There are some important terms you need to know in order to calculate capital gains and losses:

  • Capital property is anything owned by an entity that is used to generate income, either during the course of ownership or when the property is sold.

  • Capital gain is the profit earned when a piece of capital property is sold for more than its acquisition cost (or basis).

  • Capital loss recognizes the difference between a low sales price and its higher basis. All property owned by a trust or estate is capital property, and all gains and losses realized on their sale must be accounted for on Schedule D of Form 1041.

The difference between your basis in the property and the sale price determines the capital gain or loss. To determine what to record on line 4 of Form 1041 or line 13 of Form 1040, you also need to know the acquisition dates and sale dates of all property sold.

Proceeds from sales and sale dates will be found on Form 1099-B for the sale of all securities and Form 1099-S for the sale of a house. Additionally, you have to calculate the holding period, or the length of time the entity’s owned the property. Here, you have a choice between the following:

  • Long-term gain or loss (property owned for more than one year)

  • Short-term gain or loss (property owned for one year or less)

  • Inherited property, which automatically is treated as long-term, even if the estate or trust has only owned it for a day or less

Determining Acquisition Costs and Dates for Capital Property
Tax Form Acquisition Method Basis Cost Acquisition Date Holding Period
1040 From decedent’s estate Date of death value (or alternate valuation*) Date of decedent’s death Long-term
Purchased Purchase cost Trade date of purchase Long-term, if held for more than one year
1041 (estate) From decedent’s estate Date of death value (or alternate valuation*) Date of decedent’s death Long-term
Purchased Purchase cost Trade date of purchase Long-term, if held for more than one year
1041- Revocable trust funded during grantor’s lifetime From grantor Grantor’s acquisition cost Grantor’s acquisition date Long-term, if held for more than one year after grantor’s acquisition
Purchased Purchase cost Trade date of purchase Long-term, if held for more than one year
1041- Irrevocable Trust From grantor during lifetime Grantor’s acquisition cost Grantor’s acquisition date Long-term, if held for more than one year after grantor’s acquisition
From grantor after death Date of death value (or alternate valuation*) Date of grantor’s death Long-term
Purchased Purchase cost Trade date of purchase Long-term, if held for more than one year

*Alternate valuation is determined 6 months after date of death, and must be elected on the decedent’s Form 706.

Unless the decedent died in 2010, the basis of the property the decedent owned at death changes to the date of death value, and the new acquisition date is the decedent’s date of death. Even estates which are too small to file Form 706 benefit from this so-called step-up or increase in basis.

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