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Question:

My last surviving parent passed away in Massachusetts in December  2022. He held two properties in a revocable trust in which turned irrevocable upon his death. We paid estate taxes on the appraised value at the time of death on both properties. The Personal Representative wants to distribute the proceeds of the sale to the beneficiaries of the estate. Is there a capital gain tax after already paying the estate taxes?. If so, what taxes need to be paid again?

Response:

Probably there’s no taxable gain. The only gain would be any increase in the sales proceeds over the values listed on the estate tax return. This is because real estate, as well as other property such as shares of stock, receive a so-called “step up” in basis upon the owner’s death to the date of death value. This is also the value reported on estate tax returns.

This applies to all property in the decedent’s taxable estate, not just probate property. The taxable estate includes property in revocable trusts and some irrevocable trusts as well as jointly owned property and accounts with beneficiary designations.

It’s possible that the value of the two properties increased between your father’s death and their sale. If the sales price was higher than the appraised value listed on the estate tax return, there may have been a small capital gain resulting from the sale.

However, you are also allowed to deduct the costs of sale. So, for instance, let’s assume the date of death value as reported on the tax return was $1 million but you were able to sell the properties for $1.1 million. That would at first blush look like you would have $100,000 of gain. But if you paid the real estate broker a 5% commision, or $55,000, that would reduce the gain to $45,000. You may be able to reduce that further if there were other expenses, for instance to stage the properties or for legal fees related to the sale.

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