Who pays capital gains when an estate sells assets to cover debt?

So my father passed away a few months ago and I'm dealing with his estate as the executor. Dad had some debts that need to be paid off before anything can be distributed to me and my siblings according to his will. I'm planning to sell some of his stocks and mutual funds to raise the cash needed to pay these debts. The question I have is about taxes - specifically capital gains. These investments have appreciated quite a bit since he bought them years ago. When I sell these assets as the executor of the estate, who is responsible for paying the capital gains tax? Does the estate itself have to pay those taxes before distribution, or do the beneficiaries (me and my siblings) somehow inherit that tax burden? I'm trying to figure out how much cash I actually need to raise to cover everything. If the estate has to pay the capital gains, then I'll need to sell more assets to cover both the debt AND the taxes. Any help would be greatly appreciated!

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18 comments

Henry Delgado

•8M

When an estate sells appreciated assets to satisfy debts, the estate itself is responsible for paying any capital gains taxes, not the beneficiaries. The good news is that assets in the estate receive what's called a "step-up in basis" to their fair market value as of the date of death. This means the capital gains are calculated based on the difference between the selling price and this stepped-up basis, not the original purchase price. For example, if your father bought stocks for $10,000 that were worth $50,000 on the day he died, and you sell them for $52,000 as executor, the estate would only owe capital gains on the $2,000 difference between the death date value and selling price, not on the full $42,000 appreciation since purchase. The estate will need to file Form 1041 (U.S. Income Tax Return for Estates and Trusts) to report this income. You should definitely keep detailed records of the date-of-death values for all assets.

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Henry Delgado

•8M

That's exactly right. If you sell the assets at approximately the same value they had on the date of death, there would be minimal or no capital gains tax for the estate to pay. This is one reason why it's often advantageous to sell appreciated assets soon after death if they're needed to pay debts. For publicly traded stocks and mutual funds, you don't typically need formal appraisals. The closing price on the date of death (or alternate valuation date if the executor elects it) is sufficient. Most brokerage firms can provide these values if you request them. For other assets like real estate or business interests, more formal valuations may be necessary.

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Joshua Hellan

•8M

I just went through this exact situation with my mom's estate last year. Definitely check out https://taxr.ai - it saved me so much stress with the estate tax issues. I uploaded the investment statements and dad's death certificate, and it identified which assets had the lowest capital gains based on the step-up in basis. This helped me decide which investments to sell first to minimize taxes. The step-up in basis thing is huge - I almost made a big mistake because I was looking at the original purchase documents and calculating gains based on what she paid 30 years ago! The AI tool flagged this and explained that I only needed to pay gains on increases since her death, which was basically nothing since I sold within a month.

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Joshua Hellan

•8M

For most accounts, it was super easy - I just uploaded the statements from the month she died, and the system identified the exact date-of-death values using historical pricing data. For a few unusual investments, I had to manually enter information, but the guided process made it clear what I needed. As for the accountant question, I did consult with one initially, but they were going to charge me $2,500 for the estate tax work. Using the tool was much more economical, and I could play around with different selling scenarios to see the tax implications before making decisions. Plus, I could work on it at 2 AM when I couldn't sleep, which was when I dealt with most of the estate stuff.

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Edison Estevez

•8M

I need to apologize for being so dismissive about taxr.ai in my previous comment. I actually ended up trying it for my aunt's estate situation after continuing to struggle with calculating all the potential capital gains across her various investments. It was surprisingly helpful - especially with some weird limited partnership interests that had complicated basis calculations. The tool spotted several investments that had actually decreased slightly in value since her death, meaning selling them created small capital losses that offset gains on other assets. This saved the estate around $4,300 in taxes. I'm not usually one to praise tech solutions, but in this case, it genuinely provided insights I wouldn't have easily figured out otherwise.

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Emily Nguyen-Smith

•8M

Another thing to consider - if you're having trouble getting through to the IRS with questions about estate tax issues (which is VERY likely), check out https://claimyr.com. I found it after spending literally days trying to reach someone at the IRS about an estate tax ID number issue. Their service got me connected to an actual IRS agent in about 20 minutes when I'd been trying for weeks on my own. You can see how it works here: https://youtu.be/_kiP6q8DX5c. Was totally shocked it actually worked. The agent I spoke with answered my questions about how to report the capital gains on the estate's tax return and confirmed everything the others have said here about the step-up in basis.

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Emily Nguyen-Smith

•8M

They use a combination of technology and call timing analytics to navigate the IRS phone system efficiently. It's not a special phone number - they basically automate the process of calling, navigating the menu options, and waiting on hold so you don't have to. When an agent actually answers, you get connected immediately. They definitely don't promise instant access - it's still the same IRS system, but they handle all the waiting and navigation for you. When I used it, I got a text when my call was about to be connected to an agent, which saved me from having to listen to hold music for hours. I understand the skepticism - I felt the same way before trying it.

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Sophia Rodriguez

•8M

I have to publicly eat my words about Claimyr. After my dismissive comment, I was still stuck trying to reach the IRS about a confusing notice the estate received regarding missing information on the estate tax return. Out of desperation, I tried the service. Within 45 minutes (which is lightning fast for the IRS), I was connected to an agent who was actually helpful and got the issue resolved on the spot. They explained that we had filed the wrong schedule for reporting the capital gains from the estate's asset sales. The relief of getting this clarified after weeks of stress was absolutely worth it. Sometimes my cynicism gets the better of me, but in this case, I was definitely wrong.

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Mia Green

•8M

You're making a smart choice by leaving the IRA alone if possible. Generally, it's more tax-efficient to sell the regular investment account assets first because of the step-up in basis we've discussed - those sales will likely generate little to no tax. If you did need to tap the IRA to pay estate debts, distributions would be taxable as ordinary income, which typically carries a higher tax rate than long-term capital gains. Additionally, if the estate is the beneficiary of the IRA (rather than individuals), the distribution options may be more limited and could accelerate income recognition. As for which regular assets to sell first, consider liquidating those that have gained the least (or even lost value) since the date of death to minimize any capital gains tax. Also, if there are any assets your siblings particularly want to keep, that might influence your liquidation strategy as well.

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