Hello: My mother-in-law passed away on July 23rd. Just prior to her passing, she had sold her home/apartment buildings for $220K. She had an $80K basis in that property, which is what it was worth when it was built in the 1960's. She lived in the apartment building she owned in 2 of 12 units, or 1/6 of the property. The other 10 units she rented out, so the two-year residency capital gains exemption did not apply to them. My question is, is the executor of her estate still responsible for the payment of capital gains on the sale of that property via her final return, even though she is deceased?

Favman:

Filing of a final personal tax return for the deceased is one of the duties of the executor/executrix of the estate. Any taxes due will be paid from estate assets and any refund is added to the estate and distributed to the heirs.

Further, if the estate assets earn income (royalties, rent, dividends, interest earned, capital gains, etc.) after the deceased's death (so indicated because her apartment building has been rented), the executor/executrix must also file a fiduciary return (Form 1041) and pay any taxes due.

Finally, the estate may have to file an estate tax return for both the IRS and the state tax authority. The need for an estate return is determined by the size of the estate.

If you have not already done so, you should hire a competent tax professional immediately. The preparation of the final personal tax return noted above can probably wait until January 2006, but the both the final personal return and the fiduciary return may require the payment of quarterly estimated taxes, and the first quarterly estimated tax payment deadline (September 15, 2005) has already passed.