What is the process for calculating and reporting capital gains from stocks sold by the estate? – North Carolina

Short Answer

In North Carolina, the executor calculates the estate’s capital gains on stock sales using the estate’s basis (generally the fair market value at the decedent’s death, adjusted for any allowable elections) and reports them on the estate’s federal Form 1041 (Schedule D) and, if required, North Carolina Form D-407. File by the 15th day of the fourth month after the estate’s fiscal year ends, or request extensions. Capital gains are usually taxed to the estate unless properly passed through to beneficiaries on Schedules K-1.

Understanding the Problem

As a North Carolina executor, how do you calculate and report the estate’s capital gains from stock sales on the estate’s income tax returns? Here, you have already sold some shares (creating a gain), need to verify whether more tax documents exist under the estate EIN, and must open a brokerage account in the estate’s name and EIN to sell the remaining stock before you e-file this year.

Apply the Law

Under North Carolina law, a personal representative may manage and sell estate securities and must account for gains on the estate’s fiduciary income tax returns. For federal purposes, estates are separate taxpayers that typically receive a new tax basis for assets as of the decedent’s date of death (subject to limited elections). Capital gains are computed and reported on IRS Form 1041 (Schedule D), and North Carolina follows the federal framework with state-specific filing and sourcing rules. The main forums are the IRS (Form 1041) and the North Carolina Department of Revenue (Form D-407). The core deadline is the 15th day of the fourth month after the end of the estate’s chosen fiscal year; extensions are available.

Key Requirements

• Get the estate EIN and retitle accounts: Open/retitle the brokerage in the estate’s name with its EIN so sales and Forms 1099-B report under the estate.
• Determine basis and compute gain: Use the estate’s basis (generally date-of-death value, adjusted if an alternate valuation was elected) to calculate gain/loss on each sale.
• Report at the federal level: File Form 1041 with Schedule D (and Form 8949 if needed); issue Schedules K-1 if any taxable income is distributed.
• Report at the state level: If a federal 1041 is required and the estate has NC-source income or income for the benefit of a NC resident, file Form D-407 and any D-407 K-1s.
• Mind timing and extensions: The 1041/D-407 due date is the 15th day of the fourth month after the estate’s fiscal year end; use IRS Form 7004 and NCDOR Form D-410P to extend if needed.
• Allocation of gains: Capital gains generally stay with principal and are taxed to the estate unless properly allocated or distributed under the governing instrument and applicable law.

What the Statutes Say

• North Carolina Gen. Stat. § 28A-13-3 (Powers of personal representative) – Allows the executor to manage, hold, and sell securities of the estate.
• North Carolina Gen. Stat. § 105-160.2 (Taxation of estates and trusts) – North Carolina taxes undistributed net income to the extent of NC sources or for the benefit of NC residents.
• North Carolina Gen. Stat. § 28A-13-2 (Duties of personal representative) – Requires the executor to administer the estate prudently and account for assets and transactions.

Analysis

Apply the Rule to the Facts: Because you must sell remaining shares, first open a brokerage account titled to the estate with its EIN so Forms 1099-B are issued under the estate. Use date-of-death values as the starting basis for each stock sold to compute the gains that already occurred; if any estate tax election changed valuation, adjust accordingly. Report those gains on Form 1041 Schedule D and, if the estate must file in North Carolina (e.g., NC-source income or a NC beneficiary), also on Form D-407. If you distributed taxable income, prepare K-1s; otherwise, gains typically remain taxable to the estate.

Process & Timing

1. Who files: Executor/personal representative. Where: IRS (Form 1041) and North Carolina Department of Revenue (Form D-407). What: Obtain an EIN (Form SS-4); open an estate brokerage under the EIN; collect 1099-Bs and basis records; file IRS Form 1041 with Schedule D (and K-1s if applicable); file NCDOR Form D-407 and D-407 K-1s if required. When: Due the 15th day of the fourth month after the estate’s fiscal year end; request extensions with IRS Form 7004 and NCDOR Form D-410P.
2. Confirm all tax documents: Ask the broker for a consolidated 1099 under the estate EIN and realized gain detail; reconcile with your transaction reports and date-of-death valuations. Estates open for two or more taxable years may need to make federal estimated payments.
3. Finalize and deliver beneficiary statements: If income was distributed, issue federal K-1s (and D-407 K-1s when applicable). Keep working papers for your accountings with the Clerk of Superior Court.

Exceptions & Pitfalls

• Using the wrong basis: Start with date-of-death fair market value; if an estate tax election was made, use the proper valuation method for basis.
• Pre- vs. post-death sales: Sales before death belong on the decedent’s final Form 1040, not the estate’s Form 1041.
• Passing gains to beneficiaries: Capital gains typically stay with principal and are not included in distributable net income unless properly allocated or required by the governing instrument or applicable law.
• North Carolina filing scope: A D-407 return is generally required if a federal 1041 is filed and there is NC-source income or income for the benefit of a NC resident; don’t overlook D-407 K-1s.
• Estimated tax: If the estate’s taxable year ends two or more years after death, federal estimated payments may be required to avoid penalties.
• E-file timing: The IRS periodically closes e-file near year-end; if you are close to that window, either file earlier or be ready to paper-file even if you have an extension.

Talk to a Probate Attorney

If you’re dealing with stock sales in an estate and need to get the gains reported correctly and on time, our firm has experienced attorneys who can help you understand your options and timelines. Call us today at (919) 341-7055.

Disclaimer: This article provides general information about North Carolina law based on the single question stated above. It is not legal advice for your specific situation and does not create an attorney-client relationship. Laws, procedures, and local practice can change and may vary by county. If you have a deadline, act promptly and speak with a licensed North Carolina attorney.