The federal estate tax for estates of decedents who passed during 2010 (before January 1, 2011) provides two options:

1 - an exclusion amount of $5 million with a full step up in basis, or
2- an election to apply the carryover basis rules. The two levels of "basis adjustments"are:

• a $1.3 million aggregate basis increase for the assets transferred upon death by an individual person. This $1.3-million step-up in basis will eliminate any capital gains taxation for most estates.
• an additional $3 million spousal property basis increase for property that is transferred upon death to a surviving spouse.

The administrator of an estate will also be able to use the Principal Residence Exclusion, to shelter any gain on the sale of a decedent's home. This will open up new opportunities for planning, and more flexibility for planning transactions with real estate brokers and real estate professionals. An amendment to §121(d) extends the principal residence exclusion to a home sold by:
(A) the estate of a decedent
(B) any individual who acquired such property from the decedent (within the meaning of section 1022), and
(C) a trust which, immediately before the death of the decedent, was a qualified revocable trust. The exclusion will be "determined by taking into account the ownership and use by the decedent." See my article on the principal residence exclusion.