Does the Trust need to file a tax return and report the capital gains or do the capital gains pass through to the beneficiaries and they would need to report the capital gains (California Sate and Federal) on their tax returns? If the trust owned the home and sold the home then a trust return form 1041 needs to be filed and either the trust will pay the taxes or they will pass thru the income to the beneficiaries. I highly recommend using a local professional if you are not sure of what you are doing on this return so you are not surprised by an audit letter you would be responsible for in the future.
Is executor responsible for withholding taxes on behalf of the beneficiaries? NO ... if the income is passed thru then they are responsible for any taxes not the trust.
(California State and Federal)
Are there any exemptions available for capital gains on this transaction or do the beneficiaries only get the benefit of getting a stepped up cost basis? DOD step up is all they get or need.
