1- Do we need to file 1041 for the rental property from May - Dec 08?
Yes, you will file the rental property income and expense son Form 1041.
2- Who pays the taxes the trust I assume?
Generally trust will pay the tax. It will also get deduction for the expenses and hence the tax may not be much. If distributions is made to the beneficiaries out of the distributable net income than some of the income will be taxed at beneficiary level. I would suggest you engage a professional for preparing this.
3- How to deal with the sale of residential and apartment in 2009?
The sale will be reported on Form 1041 if it is sold by the estate.
4- Will it all go through the trust (1041) and the trust will pay the taxes?
Unless the assets are titled or distributed to the beneficiaries the trust will pay the taxes.
5- Do the properties get setup in basis?
Yes the properties do get a stepup in basis.
Also, if depending on his total estate, he may also be subject to Estate tax.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.