Distributing estate from income v. principal?

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1.) I am the executor of an estate. The estate has been in existence for about a year and the only income it has had was a couple of thousand dollars in interest from a regular saving account. The decedent's residence was recently sold and added to that balance. When making the final distributions from the estate, I am not clear on WHY there is a difference between distributing from the "principal" v. distributing from the "income" of the estate. Is it more beneficial to distribute to a beneficiary from one or the other?

2.) What is the purpose of the Schedule K-1?

3.) I am also not clear on how you can pass capital loss or NOL (from real estate taxes and closing costs) to the beneficiaries to use when preparing their own personal income tax returns.

Thanks for your help!
 

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