Income Tax Return of an Estate—Form 1041 — Income To Include: Taxes After a Death (2025 IRS Guide)

This guide covers “Income Tax Return of an Estate—Form 1041 — Income To Include” within taxes after a death. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 559 (2025), Survivors, Executors, and Administrators, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

An estate is a taxable entity separate from the decedent and comes into being with the death of the individual. It exists until the final distribution of its assets to the heirs and other beneficiaries. Income earned by the decedent up to and including the date of death is included on the decedent's final Form 1040 tax return. Income received after the date of death is included on the estate's Form 1041 tax return. The tax is generally figured in the same manner and on the same basis as for individuals, with certain differences in the computation of deductions and credits, as explained later.

The estate's income, like an individual's income, must be reported annually on either a calendar or fiscal year basis. The personal representative chooses the estate's accounting period upon filing the first Form 1041. The estate's first tax year can be any period that ends on the last day of a month and doesn't exceed 12 months.

Generally, once chosen, the tax year can't be changed without IRS approval. Also, on the first income tax return, the personal representative must choose the accounting method (cash, accrual, or other) to report the estate's income. Once a method is used, it ordinarily can't be changed without IRS approval. For a more complete discussion of accounting periods and methods, see Pub. 538.

Income Tax Return of an Estate—Form 1041 — Income To Include

The estate's taxable income is generally figured the same way as an individual's income, except as explained in the following discussions.

Caution:

If the decedent is a specified terrorist victim (see Specified Terrorist Victim, earlier), certain income received by the estate isn't taxable. See Pub. 3920.

Gross income of an estate consists of all items of income received or accrued during the tax year. It includes dividends, interest, rents, royalties, gain from the sale of property, and income from business, partnerships, trusts, and any other sources. For a discussion of income from dividends, interest, and other investment income, as well as gains and losses from the sale of investment property, see Pub. 550, Investment Income and Expenses. For a discussion of gains and losses from the sale of other property, including business property, see Pub. 544, Sales and Other Dispositions of Assets.

If the personal representative's duties include the operation of the decedent's business, see Pub. 334. That publication provides general information about the tax laws that apply to a sole proprietorship.

Income in respect of a decedent.

The personal representative of the estate may receive income the decedent would have reported had death not occurred. For an explanation of this income, see Income in Respect of a Decedent under Other Tax Information, earlier. An estate may qualify to claim a deduction for estate taxes if the estate must include in gross income for any tax year an amount of income in respect of a decedent. See Estate Tax Deduction under Other Tax Information, earlier.

Gain (or loss) from sale of property.

During the administration of the estate, the personal representative may find it necessary or desirable to sell all or part of the estate's assets to pay debts and expenses of administration, or to make proper distributions of the assets to the beneficiaries. While the personal representative may have the legal authority to dispose of the property, title to it may be vested (given a legal interest in the property) in one or more of the beneficiaries. This is usually true of real property. To determine whether any gain or loss must be reported by the estate or by the beneficiaries, consult local law to determine the legal owner.

Redemption of stock to pay death taxes.

Under certain conditions, a distribution to a shareholder (including the estate) in redemption of stock included in the decedent's gross estate may be allowed capital gain (or loss) treatment.

Character of asset.

The character of an asset in the hands of an estate determines whether gain or loss on its sale or other disposition is capital or ordinary. The asset's character depends on how the estate holds or uses it. If it was a capital asset to the decedent, it will generally be a capital asset to the estate. If it was land or depreciable property used in the decedent's business and the estate continues the business, it will generally have the same character to the estate that it had in the decedent's hands. If it was held by the decedent for sale to customers, it will generally be considered to be held for sale to customers by the estate if the decedent's business continues to operate during the administration of the estate.

Caution:

The gain from a sale of depreciable property between an estate and a beneficiary of that estate will be treated as ordinary income, unless the sale or exchange was made to satisfy a pecuniary (cash) bequest.

Sale of decedent's residence.

If the estate is the legal owner of a decedent's residence and the personal representative sells it in the course of administration, the tax treatment of gain or loss depends on how the estate holds or uses the former residence. For example, if, as the personal representative, you intend to realize the value of the house through sale, the residence is a capital asset held for investment and gain or loss is capital gain or loss (which may be deductible). This is the case even though it was the decedent's personal residence and even if you didn't rent it out. If, however, the house isn't held for business or investment use (for example, if you intend to permit a beneficiary to live in the residence rent free and then distribute it to the beneficiary to live in), and you later decide to sell the residence without first converting it to business or investment use, any gain is capital gain, but a loss isn't deductible.

Holding period.

An estate (or other recipient) that acquires property from a decedent and sells or otherwise disposes of it is considered to have held that property for more than 1 year, no matter how long the estate and the decedent actually held the property.

Basis of property.

The basis used to figure gain or loss for property the estate receives from the decedent is usually its FMV at the date of death. See Basis of Inherited Property under Other Tax Information, earlier, for other basis in inherited property.

If the estate purchases property after the decedent's death, the basis will generally be its cost.

The basis of certain appreciated property the estate receives from the decedent will be the decedent's adjusted basis in the property immediately before death. This applies if the property was acquired by the decedent as a gift during the 1-year period before death, the property's FMV on the date of the gift was greater than the donor's adjusted basis, and the proceeds of the sale of the property are distributed to the donor (or the donor's spouse).

Schedule D (Form 1041) and Form 8949.

Use Form 8949, Sales and Other Dispositions of Capital Assets, to report most sales and exchanges of capital assets. Use Schedule D (Form 1041), Capital Gains and Losses, to report the overall capital gains and losses from transactions reported on Form 8949, certain transactions that don't have to be reported on Form 8949, and certain other capital gains and losses. For additional information, see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1041).

Installment obligations.

If an installment obligation owned by the decedent is transferred by the estate to the obligor (buyer or person obligated to pay) or is canceled at death, include the income from that event in the gross income of the estate. See Installment obligations under Income in Respect of a Decedent, earlier. See Pub. 537 for information about installment sales.

Gain from sale of special-use valuation property.

If the personal representative elected special-use valuation for farm or other closely held business real property and that property is sold to a qualified heir, the estate will recognize gain on the sale if the FMV on the date of the sale exceeds the FMV on the date of the decedent's death (or on the alternate valuation date if it was elected).

Qualified heirs.

Qualified heirs include the decedent's ancestors (parents, grandparents, etc.) and spouse, the decedent's lineal descendants (children, grandchildren, etc.) and their spouses, and lineal descendants (and their spouses) of the decedent's parents or spouse.

For more information about special-use valuation, see Form 706 and its instructions.

Gain from transfer of property to a political organization.

Appreciated property transferred to a political organization is treated as sold by the estate. Appreciated property is property that has an FMV (on the date of the transfer) greater than the estate's basis. The gain recognized is the difference between the estate's basis and the FMV on the date transferred.

A political organization is any party, committee, association, fund, or other organization formed and operated to accept contributions or make expenditures for influencing the nomination, election, or appointment of an individual to any federal, state, or local public office.

Gain or loss on distributions in kind.

An estate recognizes gain or loss on a distribution of property in kind to a beneficiary only in the following situations.

1. The distribution satisfies the beneficiary's right to receive either of the following.

   1. A specific dollar amount (whether payable in cash, in unspecified property, or in both).

   2. A specific property other than the property distributed.

2. An election is made to recognize the gain or loss on the estate's income tax return (section 643(e)(3) election).

The gain or loss is usually the difference between the FMV of the property when distributed and the estate's basis in the property. However, see Gain from sale of special-use valuation property, earlier, for a limit on the gain recognized on a transfer of such property to a qualified heir.

If you elect to recognize gain or loss, the election applies to all noncash distributions during the tax year except charitable distributions and specific bequests. To make the election, report the transaction on Form 8949 and/or Schedule D (Form 1041), as applicable, and check the box on Form 1041, Other Information, line 7. The election must be made by the due date (including extensions) of the estate's income tax return for the year of distribution. However, if the return is timely filed without making the election, the election can be made by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach Form 8949 and/or Schedule D (Form 1041), as applicable, to the amended return and enter “Filed pursuant to section 301.9100-2” on the form. File the amended return at the same address you filed the original return. IRS consent is required to revoke the election.

For more information, see Property distributed in kind under Income Distribution Deduction, later.

Caution:

Under the related persons rules, a loss can't be claimed for property distributed to a beneficiary unless the distribution is in discharge of a pecuniary bequest. Also, any gain on the distribution of depreciable property is ordinary income.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 559 (2025), Survivors, Executors, and Administrators: Income Tax Return of an Estate—Form 1041 — Income To Include — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.