General Instructions

Note. Any reference in these instructions to “you” means the fiduciary of the estate or trust.

Purpose of Schedule

These instructions explain how to complete Schedule D (Form 1041). Complete Form 8949 before you complete line 1b, 2, 3, 8b, 9, or 10 of Schedule D.

Use Schedule D to report the following.

  • The overall capital gains and losses from transactions reported on Form 8949.

  • Certain transactions that the estate or trust does not have to report on Form 8949.

  • Gain from Part I of Form 4797, Sales of Business Property.

  • Capital gain or loss from Form 4684, Casualties and Thefts.

  • Capital gain from Form 6252, Installment Sale Income.

  • Capital gain or loss from Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.

  • Capital gain or loss from Form 8824, Like-Kind Exchanges.

  • Undistributed long-term capital gains from Form 2439.

  • Capital gain or loss from partnerships, S corporations, or other estates or trusts.

Note. For more information, see Pub. 544, Sales and Other Dispositions of Assets, and Instructions for Form 8949.

Other Forms You May Have To File

Use Form 8949 to report the sale or exchange of a capital asset (defined later) not reported on another form or schedule. Complete all necessary pages of Form 8949 before you complete line 1b, 2, 3, 8b, 9, or 10 of Schedule D (Form 1041). See Lines 1a and 8a, later, for more information about when Form 8949 is needed and when it is not.

Use Form 4797, Sales of Business Property, to report the following.

  1. The sale or exchange of:

    1. Property used in a trade or business;

    2. Depreciable and amortizable property;

    3. Oil, gas, geothermal, or other mineral property; and

    4. Section 126 property.

  2. The involuntary conversion (other than from casualty or theft) of property used in a trade or business and capital assets held for business or profit.

  3. The disposition of noncapital assets other than inventory or property held primarily for sale to customers in the ordinary course of a trade or business.

  4. Ordinary loss on the sale, exchange, or worthlessness of small business investment company (section 1242) stock.

  5. Ordinary loss on the sale, exchange, or worthlessness of small business (section 1244) stock.

Use Form 4684, Casualties and Thefts, to report involuntary conversions of property due to casualty or theft.

Use Form 6781, Gains and Losses From Section 1256 Contracts and Straddles, to report gains and losses from section 1256 contracts and straddles.

Use Form 8824, Like-Kind Exchanges, if the estate or trust made one or more like-kind exchanges. A like-kind exchange occurs when the estate or trust exchanges business or investment property for property of a like kind.

Special Rules for Determining Basis of Estate and Trust Property

Basis of trust property.   Generally, the basis of property acquired by gift is the same as its basis in the hands of the donor. However, if the FMV of the property at the time it was transferred to the trust is less than the transferor's basis, then the FMV is used to determine any loss upon disposition.

  If the property was transferred to the trust after 1976, and a gift tax was paid under Chapter 12, then increase the donor's basis as follows:

  Multiply the amount of the gift tax paid by a fraction, the numerator of which is the net appreciation in value of the gift (defined below), and the denominator of which is the amount of the gift. For this purpose, the net appreciation in value of the gift is the amount by which the FMV of the gift exceeds the donor's adjusted basis.

Basis of decedent's estate property.   Generally, the basis of property acquired by a decedent's estate is the FMV of the property at the date of the decedent's death, or the alternate valuation date if the executor elected to use an alternate valuation under section 2032.

  See Pub. 551 and the Instructions for Form 706 for a discussion of the valuation of qualified real property under section 2032A.

Basis of property acquired from a decedent who died in 2010.   See Pub. 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details about determining the basis of property acquired from a decedent who died in 2010.

Basis of assets held on January 1, 2001, where an election to recognize gain was made.   If you elected on behalf of an estate or trust to recognize gain on an asset held on January 1, 2001, the basis in the asset is its closing market price or FMV, whichever applies, on the date of the deemed sale and reacquisition, whether the deemed sale resulted in a gain or an unallowed loss.

Carryover basis.   Carryover basis determined under repealed section 1023 applies to property acquired from a decedent who died after December 31, 1976, and before November 7, 1978, only if the executor made a timely filed election on Form 5970-A, Election of Carryover Basis.

Capital Asset

Each item of property held by the estate or trust (whether or not connected with a trade or business) is a capital asset, except the following:

  • Stock in trade, inventory or property held primarily for sale to customers.

  • Depreciable or real property used in a trade or business, even if it is fully depreciated.

  • Copyrights; literary, musical, or artistic compositions; letters or memoranda; or similar property eligible for copyright protection that the trust received from someone whose personal efforts created them or for whom they were created in a way (such as by gift) that entitled the trust to the basis of the previous owner. In the case of letters, memoranda, or similar property, such property may also be prepared or produced for the trust.  
    Note. Under section 1221(b)(3), the trust can elect to treat musical compositions and copyrights in musical works as capital assets if it acquired the assets under circumstances entitling it to the basis of the person who created the property or for whom it was prepared or produced.

  • Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of inventoriable assets or property held primarily for sale to customers.

  • Certain U.S. Government publications not purchased at the public sale price.

  • Certain “commodities derivative financial instruments” held by a dealer (see section 1221(a)(6)).

  • Certain hedging transactions entered into in the normal course of a trade or business (see section 1221(a)(7)).

  • Supplies regularly used in a trade or business.

You may find additional helpful information in the following publications.

  • Pub. 544, Sales and Other Dispositions of Assets.

  • Pub. 551, Basis of Assets.

Short-Term or Long-Term

Separate the capital gains and losses according to how long the estate or trust held or owned the property. The holding period for short-term capital gains and losses is 1 year or less. The holding period for long-term capital gains and losses is more than 1 year. Property acquired from a decedent is treated as held for more than 1 year.

Note.

Long-term treatment may not apply to property acquired from a decedent who died in 2010 where the estate elected the use of carryover basis if the property was held less than 1 year. See Pub. 4895 for details.

To figure the length of the period the estate or trust held property, begin counting on the day after the estate or trust acquired the property and include the day it was disposed. Use the trade dates for the dates of acquisition and sale of stocks and bonds traded on an exchange or over-the-counter market.

Section 643(e)(3) Election

For in-kind noncash property distributions, a fiduciary may elect to have the estate or trust recognize gain or loss in the same manner as if the distributed property had been sold to the beneficiary at its fair market value (FMV). The distribution deduction is the property's FMV. This election applies to all distributions made by the estate or trust during the tax year. Once the election is made, it may only be revoked with IRS consent.

Note.

Section 267 does not allow a trust or a decedent's estate to claim a deduction for any loss on property to which a section 643(e)(3) election applies. In addition, when a trust or a decedent's estate distributes depreciable property, section 1239 applies to deny capital gains treatment for any gain on property to which a section 643(e)(3) election applies.

Related Persons

A trust cannot deduct a loss from the sale or exchange of property directly or indirectly between any of the following:

  • A grantor and a fiduciary of a trust,

  • A fiduciary and a fiduciary or beneficiary of another trust created by the same grantor,

  • A fiduciary and a beneficiary of the same trust,

  • A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is owned directly or indirectly by or for the trust or by or for the grantor of the trust, or

  • An executor of an estate and a beneficiary of that estate, except when the sale or exchange is to satisfy a pecuniary bequest (that is, a bequest of a sum of money).

Items for Special Treatment

  • Bonds and other debt instruments. See Pub. 550, Investment Income and Expenses.

  • A nonbusiness bad debt must be treated as a short-term capital loss and can be deducted only in the year the debt becomes totally worthless. See Pub. 550 for details.

  • Wash sales of stock or securities (including contracts or options to acquire or sell stock or securities) (section 1091).

  • Gain or loss on options to buy or sell. See Pub. 550.

  • Certain real estate subdivided for sale that may be considered a capital asset (section 1237).

  • Gain on disposition of stock in an interest charge domestic international sales corporation (DISC) (section 995(c)).

  • Gain on the sale or exchange of stock in certain foreign corporations (section 1248).

  • Sales of stock received under a qualified public utility dividend reinvestment plan. See Pub. 550 for details.

  • Transfer of appreciated property to a political organization (section 84).

  • Amounts received by shareholders in corporate liquidations. See Pub. 550.

  • Cash received in lieu of fractional shares of stock as a result of a stock split or stock dividend. See Pub. 550.

  • Load charges to acquire stock in a regulated investment company (including a mutual fund), which may not be taken into account in determining gain or loss on certain dispositions of the stock if reinvestment rights were exercised. See Pub. 550.

  • The sale or exchange of S corporation stock or an interest in a trust held for more than 1 year, which may result in collectibles gain (28% rate gain). See the instructions for line 18c.

  • The sale or other disposition of a partnership interest may result in ordinary income, collectibles gain, or unrecaptured section 1250 gain.

  • Gain or loss on the disposition of securities futures contracts. See Pub. 550.

  • Gains from certain constructive ownership transactions. Gain in excess of the gain the estate or trust would have recognized if the estate or trust held a financial asset directly during the term of a derivative contract must be treated as ordinary income. See section 1260 for details.

  • If qualified dividends include extraordinary dividends, any loss on the sale or exchange of the stock is a long-term capital loss to the extent of the extraordinary dividends. An extraordinary dividend is a dividend that is at least 10% (5% in the case of preferred stock) of the basis in the stock.

Constructive Sales Treatment for Certain Appreciated Positions

Generally, the estate or trust must recognize gain (but not loss) on the date it enters into a constructive sale of any appreciated position in stock, a partnership interest, or certain debt instruments as if the position were disposed of at FMV on that date.

The estate or trust is treated as making a constructive sale of an appreciated position when it (or a related person, in some cases) does one of the following:

  • Enters into a short sale of the same or substantially identical property (that is, a “short sale against the box”),

  • Enters into an offsetting notional principal contract relating to the same or substantially identical property,

  • Enters into a futures or forward contract to deliver the same or substantially identical property, or

  • Acquires the same or substantially identical property (if the appreciated position is a short sale, offsetting notional principal contract, or a futures or forward contract).

Exception.   Generally, constructive sale treatment does not apply if:
  • The estate or trust closed the transaction before the end of the 30th day after the end of the year in which it was entered into,

  • The estate or trust held the appreciated position to which the transaction relates throughout the 60-day period starting on the date the transaction was closed, and

  • At no time during that 60-day period was the estate's or trust's risk of loss reduced by holding certain other positions.

  For details and other exceptions to these rules, see Pub. 550.

Exclusion of Gain on Qualified Small Business (QSB) Stock (Section 1202)

Section 1202 provides for an exclusion of 50% of the eligible gain on the sale or exchange of QSB stock. This exclusion can be up to 60% for certain empowerment zone business stock. The section 1202 exclusion applies only to QSB stock held for more than 5 years.

To be QSB stock, the stock must meet all of the following tests:

  1. It must be stock in a C corporation (that is, not S corporation stock).

  2. It must have been originally issued after August 10, 1993.

  3. As of the date the stock was issued, the corporation was a QSB. A QSB is a domestic C corporation with total gross assets of $50 million or less (a) at all times after August 9, 1993, and before the stock was issued, and (b) immediately after the stock was issued. Gross assets include those of any predecessor of the corporation. All corporations that are members of the same parent-subsidiary controlled group are treated as one corporation.

  4. The estate or trust acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property or as pay for services (other than as an underwriter) to the corporation. In certain cases, the estate or trust may meet the test if it acquired the stock from another person who met this test (such as by gift or inheritance) or through a conversion or exchange of QSB stock the estate or trust held.

  5. During substantially all the time the estate or trust held the stock:

    1. The corporation was a C corporation,

    2. At least 80% of the value of the corporation's assets was used in the active conduct of one or more qualified businesses (defined below), and

    3. The corporation was not a foreign corporation, DISC, former DISC, corporation that has made (or that has a subsidiary that has made) a section 936 election, regulated investment company, real estate investment trust, REMIC, FASIT, or cooperative.

Note.

A specialized small business investment company (SSBIC) is treated as having met test 5b above.

Qualified business.   A qualified business is any business other than the following:
  • One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services;

  • One whose principal asset is the reputation or skill of one or more employees;

  • Any banking, insurance, financing, leasing, investing, or similar business;

  • Any farming business (including the raising or harvesting of trees);

  • Any business involving the production of products for which percentage depletion can be claimed; or

  • Any business of operating a hotel, motel, restaurant, or similar business.

  For more details about limits and additional requirements that may apply, see Pub. 550 or section 1202.

Empowerment zone business stock.   Generally, the estate or trust can exclude up to 60% of its gain on certain QSB stock if it meets the following additional requirements.
  1. The stock sold or exchanged was stock in a corporation that qualified as an empowerment zone business during substantially all of the time the estate or trust held the stock.

  2. The estate or trust acquired the stock after December 21, 2000.

  Requirement 1 will still be met if the corporation ceased to qualify after the 5-year period that began on the date the estate or trust acquired the stock. However, the gain that qualifies for the 60% exclusion cannot be more than the gain the estate or trust would have had if it had sold the stock on the date the corporation ceased to qualify.

  See section 1397C for more details.

Pass-through entities.   If the estate or trust held an interest in a pass-through entity (a partnership, S corporation, mutual fund, or other regulated investment company) that sold QSB stock, the estate or trust generally must have held the interest on the date the pass-through entity acquired the QSB stock and at all times thereafter until the stock was sold to qualify for the exclusion.

How to report.

Report the sale or exchange of QSB stock on Form 8949, Part II, with the appropriate box checked, as it would be reported if the exclusion was not taken. Then enter “Q” in column (f) and enter the amount of the excluded gain as a negative number in column (g). Put it in parentheses to show it is negative. Complete all remaining columns. See the Instructions for Form 8949, columns (f), (g), and (h). On line 2 of the 28% Rate Gain Worksheet, include an amount equal to the 50% exclusion (2/3 of the exclusion if a 60% exclusion was claimed). Also, see the Instructions for Schedule I (Form 1041), line 9, for information on the amount of the exclusion to include on Schedule I (Form 1041).

Gain from Form 1099-DIV.

If the estate or trust received a Form 1099-DIV, Dividends and Distributions, with a gain in box 2c, part or all of that gain (which is also included in box 2a) may be eligible for the section 1202 exclusion. In column (a) of Form 8949, Part II, enter the name of the corporation whose stock was sold. In column (f), enter “Q” and in column (g) enter the amount of the excluded gain as a negative number. See the Instructions for Form 8949, columns (f), (g), and (h). Also, include the amount of the 50% exclusion as a gain on line 2 of the 28% Rate Gain Worksheet (include 2/3 of the exclusion if a 60% exclusion was claimed).

Gain from Form 2439.

If the estate or trust received a Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, with a gain in box 1c, part or all of that gain (which is also included in box 1a) may be eligible for the section 1202 exclusion. In column (a) of Form 8949, Part II, enter the name of the corporation whose stock was sold. In column (f), enter “Q” and in column (g) enter the amount of the excluded gain as a negative number. See the Instructions for Form 8949, columns (f), (g), and (h). Also, include the amount of the 50% exclusion as a gain on line 2 of the 28% Rate Gain Worksheet (include 2/3 of the exclusion if a 60% exclusion was claimed).

Gain from an installment sale of QSB stock.

If all payments are not received in the year of sale, a sale of QSB stock that is not traded on an established securities market generally is treated as an installment sale and is reported on Form 6252, Installment Sale Income. Part or all of any gain from the sale that is reported on Form 6252 for the current year may be eligible for the section 1202 exclusion. In column (a) of Form 8949, Part II, enter the name of the corporation whose stock was sold. In column (f), enter “Q” and in column (g) enter the amount of the allowable exclusion as a negative number. See the Instructions for Form 8949, columns (f), (g), and (h). Also, include the amount of the 50% exclusion as a gain on line 2 of the 28% Rate Gain Worksheet (include 2/3 of the exclusion if a 60% exclusion was claimed).

Alternative minimum tax.

You must enter 7% of the estate's or trust's allowable exclusion for the year on line 9 of Schedule I (Form 1041).

Rollover of gain from QSB stock.   If the estate or trust held QSB stock (as defined earlier) for more than 6 months, it may elect to postpone gain if it purchased other QSB stock during the 60-day period that began on the date of the sale.

  The estate or trust must recognize gain to the extent the sale proceeds exceed the cost of the replacement stock. Reduce the basis of the replacement stock by any postponed gain.

  The estate or trust must make the election no later than the due date (including extensions) for filing Form 1041 for the tax year in which the stock was sold. If the original Form 1041 was filed on time, the election may be made on an amended return filed no later than 6 months after the due date of the original return (excluding extensions). Write “Filed pursuant to section 301.9100-2” at the top of the amended return, and file it at the same address used for the original Form 1041.

How to report.

To make the election, report the sale on Part I or Part II of Form 8949 (depending on how long the estate or trust owned the stock), as it would be reported if the election was not made. Then enter “R” in column (f) and the amount of the postponed gain from the section 1045 rollover as a negative number in column (g). Complete all remaining columns. See the Instructions for Form 8949, columns (f), (g), and (h).

Rollover of Gain From Publicly Traded Securities.   The estate or trust may elect to postpone gain from the sale of publicly traded securities by purchasing common stock or a partnership interest in a specialized small business investment company during the 60-day period that began on the date of the sale. See Pub. 550.

How to report.

To make the election to postpone gain, report the sale in Part I or Part II of Form 8949 (depending on how long the estate or trust owned the stock), as it would be reported if the election was not made. Then enter “R” in column (f). Enter the amount of the postponed gain as a negative number in column (g). Put the amount in column (g) in parentheses to show it is negative. Complete all remaining columns. See the Instructions for Form 8949, columns (f), (g), and (h).

Exclusion of gain from DC Zone assets or qualified community assets.   If the estate or trust sold or exchanged a District of Columbia Enterprise Zone asset or a qualified community asset that it held for more than 5 years, it may be able to exclude the amount of qualified capital gain that it would otherwise include in income. The exclusion of gain from DC Zone assets applies to an interest in, or property of, certain businesses operating in the District of Columbia. See section 1400B for more details on this exclusion. The exclusion of gain from qualified community assets applies to an interest in, or property of, certain renewal community businesses. See section 1400F for more details on this exclusion.

How to report.

Report the sale or exchange of a “DC Zone asset” or “qualified community asset” on Form 8949, Part II, with the appropriate box checked, as it would be reported if the exclusion was not taken. Enter “X” in column (f) and the amount of the allowable exclusion as a negative number in column (g). Put the amount in column (g) in parentheses to show it is negative. Complete all remaining columns. See the Instructions for Form 8949, columns (f), (g), and (h).


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