@NightTreader It's a good idea to get a FMV written estimate from a realtor around for the date of sale, and keep it for tax records for documentation of how you arrived at that cost basis.
'Primary residence' means for the decedent, NOT the beneficiaries.
The beneficiaries would not be able to claim a capital loss on their returns, as their investment was $0. It would be a Capital Loss on the Trust Tax Return Form 1041.
The beneficiaries would need to report the income from their individual distribution amounts from the trust K-1 they receive on their tax returns.
Here's a detailed article on Form K-1 you may find helpful, plus more info from the IRS on Form 706.
This link has info for using TurboTax Business to prepare a Form 1041.
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