Does a decedent have to pay capital gains on federal tax return?

[aninkling]

My father died on Thanksgiving last.  We immediately sold all stock.  There was a significant capital gains.  The total amount of his estate was distributed the next week.  The accountant argues that the basis changed on midnight of the day he died.  Therefore my father's estate = the tax return filed under his social for last year, has to pay no capital gains.  I argue that I and the other beneficiaries don't have to pay capital gains because the basis for us is the basis on that midnight, but his social has to pay capital gains tax as part of the return for last year.  What is the law?  

The second part of my question is:  shouldn't his income tax return have been filed under a federal ID for the estate?  Exactly how does the transition between a personal income tax (1040) and an estate income tax (1041) work (and when)?

[aninkling]

I'm still missing something and the IRS documentation doesn't clear this up.  I guess something is just going over my head.  So... He died on Thanksgiving.  His financial stuff was sold the following Monday, the first day of business after his death.  He got a nice capital gains according to the end of year 1099-B summary reported on his social security number.  And at this point I guess I should say "his estate got..."  The result was distributed to the beneficiaries.   We still had his house to sell, which was sold this year.  There were other incomes this year, 2019, as well.  So, are the capital gains from the financial stuff ignored by all?  Should a 1041 be filed for the estate with the estate ID for the 2018 year declaring those capital gains?  This wouldn't be the final 1041 because there is income this year, 2019, from the estate plus the income on the sale of the house (no profit or loss for that).   There has been no distribution reported anywhere yet, and I know that the distributions should be reported some time as a result of the 1041 process.  Is that reported only on the final (2019) 1041 filing, or is the distribution made in 2018 reported on a 1041 that was not filed in 2018?

[aninkling]

So I accept the solution that the accountant should not have reported the sale value of the financial stuff on my father's 1040 for 2018  (The 1040 showed a capital gains of 0 because the accountant reported the stepped up valuation for both the sold value and the basis.  That 1040 should be amended to report no capital gains entry at all.)

I believe you are saying we have two options after filing an amended 1040 for his social. 

 (1) File a 1041 for 2018 (it will be late, as this is in May) with the capital gains reported via the 1099B with his social on it and we also report the distribution made in 2018.  But this is not the final distribution.  We file a final 1041 for 2019 with the transactions for 2019 and close the estate. 

(2) We not file a 1041 at all for 2018 but file a final 1041 for 2019 and include the capital gains under his social 1099B reported in 2018, as well as all income, etc and distributions.  

[NCperson]

very well written and "spot on" advice

Personally, I would expect the accountant to fix the errors at no charge to you.

[pierceMD]

How did you sell without going through probate?

If you were an owner of the account, then it wouldn't go through probate, and wouldn't be part of the estate. But your cost basis would be when the stock was bought.