What you need to know about paying taxes on a home sold after a spouse’s death.
Q: Just finished your awesome article on computing tax due on the sale of the primary home when a spouse passes. I just had a quick question.
Let’s say a spouse passes on March 01, 2017. The first thought is that I must sell home by February 28, 2019 in order to be eligible to retain her $250,000 exemption. I read somewhere that I could sell it anytime this year, so long as I had it sold by the deadline for filing her taxes of December 31st.
Do you happen to know which of those dates are correct? Many thanks for your response.
A: Thank you for reading our columns. There are a couple of issues in your question that we need to address. The first is the home sale exclusion of $250,000 and the other is the sale of a home after a person has died.
In general, if you have lived in your home for two out of the last five years, when you sell that primary residence, you’ll be entitled to exclude from federal income taxes up to $250,000 of profits. If you’re married, you and your spouse would be entitled to exclude from tax up to $500,000. In either case, the home must be your principal residence and you must have lived in that home for two out of the last five years.
Let’s say you’re single and purchased your home 20 years ago for $100,000. You lived in the home for the last 20 years as your primary residence and now plan to sell it for $200,000. We’ll also assume your profit on the sale would be $100,000. In this example, you wouldn’t have to pay any federal income taxes on the $100,000 of profit.
In the same example if you had moved out of the home two years ago and lived in Florida since then, you’d still qualify to exclude from federal income taxes the $100,000 profit from the sale of the home. Unfortunately, if you moved out of the home 4 years ago, you’d be out of luck and would have taxes to pay. (There are certain exceptions to the rule and under some circumstances you get partial credit of the exclusion. Check out IRS Publication 523 Selling Your Home for details.)
Now when it comes to an owner who has died — as in your question — you have additional issues that you face as a surviving spouse. If your spouse died on March 1, 2017, you may have inherited her share of the home at that time. If you did, you would receive the step-up basis for her share of the home. So, let’s say the home was worth $200,000 when she died, and she owned half. You would inherit her half at the stepped-up basis of $200,000, which means that if you then sold the home for $200,000, you would only owe tax on your share of the property.
However, you’d still have your $250,000 exclusion as long as you have continued to live in the home as your primary residence. As long as the total amount of profit is less than $250,000 (you’ll pay tax on her share, but starting at the higher cost basis), you’re fine.
Could you get the $500,000 exclusion for married couples filing a joint tax return?
Let’s say you purchased the home for $100,000 and have an offer to buy it today for $600,000. You’d want to see if you qualify for the $500,000 exclusion. As a widowed taxpayer, you would get the $500,000 exclusion if you sell the home within two years of your spouse’s death, have not remarried at the time of the sale, neither you or your spouse took the exclusion benefit within two years prior to the sale of the current home and you meet the two-year ownership and residency requirements.
Given all this information, if you sell and have a profit of $250,000 or less and satisfy the two out of five year rule for your primary residence, you should be fine selling whenever you want. If your profit is greater than $250,000, you’d need to close on the sale by February 28 (if your dates are accurate) to qualify for the higher exclusion. Otherwise, you’ll need to think through the costs of purchase and sale, any material improvements you’ve made to the home, etc., and see if you can bring down the profit that way.
For more details, please consult with your tax preparer or estate attorney.