If the house was sold while in the trust, the trust will report the sale. Unlike a revocable trust, an irrevocable trust is treated as an entity that is legally independent of it's grantor for tax purposes. Accordingly, trust income is taxable, and the trustee must file a tax return on behalf of the trust.
Distributions to beneficiaries of an irrevocable trust, are taxable to beneficiaries at ordinary income tax rates.
When a grantor -- a living-trust creator -- dies, the trust becomes irrevocable. An irrevocable trust is an independent taxpayer in the eyes of the IRS, required to file its own tax return. Responsibility for completing the paperwork falls to the trustee appointed by the grantor. If you're the trustee, you must file the final trust return.
For more information about the trust return you can use this link: Instructions for Form 1041.
If you find that you should report the sale on your tax return (the trustee should be able to tell you or if you are the trustee, you can check with the attorney who helped with the estate or set up the trust) here is the information about how you, as an individual would report the sale of inherited property.
Inherited property receives a stepped up basis in the hands of the beneficiaries, and is always considered to be held long term. This means that the "cost basis" to each beneficiary is the value of the home on the date of death. If the sale occurs close in time to the inheritance, then the result of the sale would be little to no gain. This means little to no tax.
Example: The house value on the date of death is $100,000, plus the cost of the capital improvements you made after the date of death ($5,000 estimated), then it was sold by you for $115,000. The selling expenses ($3,000) would be also reduce the gain. The result in this scenario is a $13,000 gain.
The maximum tax rate for long term capital gain (LTCG) is 20%, however it is lower based on your marginal tax rate. LTCGs are taxed at rates of 0%, 15%, or 20%, depending on your tax bracket.
This TurboTax article will help you decide whether you need to file the trust return. Click the blue hyperlinks for more detail.
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