My brother sold a rental home in California and passed away before he could exchange the proceeds into a new rental home. Does his estate owe capital gains?

[kgarciashine]

if the estate does owe capital gains, can we avoid them if the estate purchases a property?

[CalCountry]

Two separate events. 1) The sale of the rental home prior to your brother's death; and 2) The unexecuted "exchange" of the proceeds into a different investment.  Were the assets moved into an estate trust?
The estate may possibly owe federal and California taxes.  California taxes capital gains as "ordinary" income (just like wages). So it is possible your brother's estate (or YOU if you inherited the property with unpaid taxes) may have to pay federal/California taxes.  You need to consult a tax professional experienced in federal estate and California taxes to resolve your particular situation.

[Anita01 · Accepted solution]

Exchanges are complex, and i agree you should consult  a local tax person because you have an unusual situation, but make sure the person is very knowledgeable about 1031 exchanges. 

Until you have an answer to completing the exchange there are some things you need to know, in case you don't already know. In an exchange, an intermediary is brought in at the time of the original property sale.  That intermediary takes charge of the funds from the sale because those are the exact same funds that must be used in the purchase of the replacement property.  (Not just the same amount of money but that exact same money). 

The seller must also file a form within 45 days, identifying the possible replacement property.  It's possible your brother did engage such an intermediary, who may be holding those funds and it's very important that they not be intermingled with any other funds, such as general estate funds.  His real estate broker would be the place to ask whether your brother had taken the necessary steps to begin to execute an exchange.