Yes, you generally need to find out the value of the property on the date of your mother's death. You have to be careful because not all methods are acceptable. One generally accepted method is that if the property is sold within a short period of time as the date of death, then the selling price can be used as the fmv on the date of death.
One thing you must watch out for is that the type of use of the property before the decedent's death is generally the same as the type of use of when it is received into the trust due to death.
So, if the house was the decedent's principal residence prior to death, then the trust would treat it as a principal residence and a principal residence is personal use property and a loss on the sale of personal use property is not deductible on the trust tax return or even the tax return of the beneficiaries if the trust distributes the property to beneficiaries, who, in turn sell it on their personal tax returns, it would be treated the same. The personal loss is not deductible, but a gain on the sale would be taxable.
The general IRS definition of fair market value is this:
fair market value (FMV) is the price that an asset would sell for on the open market between a willing buyer and a willing seller.
The step-up in basis does not give the beneficiaries do not get a free pass on capital gains on the sale of the property. It does, however, help make up for the decedent not being able to take the section 121 exclusion on the sale of their principal residence.
The step up in basis does not eliminate all capital gains on the sale of the property, just those in excess of fmv on the date of death.
You can consider that when you sell the house, you may have closing costs to add to the cost "fmv on date of death" basis you are using to show on Sch D against the selling price. By the time you do that, then you may no longer have a gain.
