How to File IRS Schedule D (Form 1041) for an Estate

Fiduciaries use IRS Schedule D (Form 1041) to report capital gains and losses for an estate or trust. This schedule attaches to Form 1041, the U.S. Income Tax Return for Estates and Trusts, and details the outcomes from selling capital assets like stocks, bonds, or real estate. The net gain or loss calculated on Schedule D flows to the main Form 1041 and affects the estate’s or trust’s overall taxable income.

Determining if Schedule D is Required

Filing Schedule D is necessary when an estate or trust sells a capital asset. The IRS defines capital assets as most property held for investment, such as stocks, bonds, mutual funds, and investment real estate. If an estate sells inherited shares of stock, the transaction must be reported.

In contrast, property held for sale to customers in the course of a business is not a capital asset. Reporting on Schedule D is for assets held for potential appreciation, so the sale of an investment rental property is a capital transaction requiring the form.

Gathering Information for Schedule D

Before filling out Schedule D, a fiduciary must compile information for each asset sold, including brokerage statements (Form 1099-B) and real estate closing statements. The holding period, based on acquisition and sale dates, determines if a gain or loss is short-term (held one year or less) or long-term (more than one year).

Required information includes:

• A description of the property
• The acquisition date
• The sale date
• The sales price
• The cost or other basis

Determining an asset’s basis is a key step, as rules differ by acquisition method. For assets inherited by an estate, the basis is the fair market value on the date of the owner’s death, known as a “stepped-up basis.” For example, if stock purchased for $10,000 was worth $50,000 on the owner’s death date, the estate’s basis is $50,000.

For assets gifted to a trust, the trust assumes the grantor’s original basis, called a “carryover basis.” If the trust or estate purchased the asset, the basis is its purchase price plus acquisition costs like commissions.

A Guide to Completing Schedule D

Most transactions are first detailed on Form 8949, Sales and Other Dispositions of Capital Assets, before the totals are transferred to Schedule D.

Part I of the schedule is for Short-Term Capital Gains and Losses from assets held for one year or less. For each transaction, the fiduciary enters the sale proceeds and the asset’s cost basis to calculate the gain or loss. These are then netted to arrive at a total net short-term capital gain or loss on line 7.

Part II operates similarly for Long-Term Capital Gains and Losses, covering assets held for more than one year. The sales price and basis for each long-term asset are reported, and the individual results are combined to determine the net long-term capital gain or loss on line 15.

Part III, Summary of Parts I and II, consolidates these results. The net short-term figure from Part I and the net long-term figure from Part II are combined to yield the final net gain or loss. This summary figure on line 19 is then transferred to line 4 of Form 1041.

Taxation and Distribution of Capital Gains

The tax implications of a net capital gain depend on whether the gains are retained by the fiduciary or distributed to beneficiaries. If gains are kept within the estate or trust, they are allocated to the principal and taxed directly to the fiduciary. The income tax rates for estates and trusts are compressed, meaning higher tax rates apply at lower income levels than individual rates. For 2025, the 20% capital gains rate applies to fiduciary income over $15,900.

The distribution of capital gains is governed by Distributable Net Income (DNI). Capital gains are normally excluded from DNI and taxed at the trust or estate level. An exception occurs if the trust’s governing document or state law mandates the distribution of capital gains, or if the fiduciary has a consistent practice of distributing them.

When capital gains are distributed, they are reported on Schedule K-1 (Form 1041), which informs each beneficiary of the income’s amount and character. Beneficiaries then report this income on their personal tax returns. If the estate or trust has a net capital loss, the fiduciary can deduct up to $3,000 of that loss against ordinary income annually, with unused losses carried over to future tax years.