Tax on Capital Gains When Selling Home After Spouse's Death

Takeaways

• Surviving spouses can exclude up to $500,000 of capital gains from the sale of their main residence if they sell within two years of their spouse’s death.

• The cost basis of property is “stepped up” under federal law when a property owner dies, meaning the current value of the property becomes the new cost basis.

• Working with an estate planning attorney can help you understand the tax consequences of selling property after the death of a spouse and avoid delaying estate planning tasks and deadlines.

If your spouse has passed away, you are likely coping not only with trauma and grief, but also a lengthy list of difficult decisions. You may even find yourself having to decide whether (or when) to sell the home you had shared. Keep in mind that certain tax considerations could affect such a decision. Continue reading to learn more about some of the potential tax consequences.

If you had shared your home with your partner, you may, for example, be thinking about selling the property and downsizing to something smaller. One of the biggest concerns when selling property is capital gains tax.

What Is Capital Gains Tax?

A capital gain is the difference between the “cost basis” of your property and its selling price. The cost basis is usually the purchase price of property.

Imagine you purchased a house for $250,000 and later sold it for $450,000. You would subsequently have $200,000 of capital gain ($450,000 - $250,000 = $200,000).

Once you have sold a piece of property for a profit, the federal government then has you pay a tax on your capital gain. Note that your age has no impact on your capital gains tax under current law. How much you owe for this tax depends in part on how long you held onto the property before selling it.

Your level of income also affects your capital gains tax rate. For most people, the federal capital gains tax rate does not exceed 15 percent.

Yet each state has different tax laws regarding capital gains. While some have no such tax, others can range from single to double digits.

Under federal law, a married couple filing taxes jointly can sell their main residence and exclude from their gross income up to $500,000 of the gain from the sale. Single individuals can exclude only $250,000.

Surviving spouses get the full $500,000 exclusion if they sell their house within two years of the date of their spouse’s death. (They must meet other ownership and use requirements as well.) A surviving spouse who sells their home within two years also may not have to pay any capital gains tax on the sale.

If it has been more than two years after their partner’s death, the surviving spouse can exclude only $250,000 of capital gains. However, the surviving spouse does not automatically owe taxes on the rest of any gain.

Note that property you inherit also may be subject to significant capital gains taxes if you decide to sell. If you inherit property, how long you hold onto it also can affect how much you will owe in capital gains taxes. Yet, with property planning, you may be able to avoid paying high capital gains taxes. Be sure to consult with an estate planning attorney in your state.

Step Up in Basis

When a property owner dies, the cost basis of the property is “stepped up” under federal law. This means the current value of the property becomes the new cost basis. In most states, when a joint owner dies, half of the value of the property gets a step up.

For example, suppose Blake and Cameron, a married couple, buy property for $200,000. Blake passes away when the property has a fair market value of $300,000. The new cost basis of the property for Cameron will be $250,000. (Cameron’s original 50 percent interest of $100,000 + $150,000 for the other half passed to him at Blake’s death = $250,000.)

Other kinds of assets may see a step up in basis upon the death of a spouse, but not all. For example, the stepped-up basis does not apply to such assets as pensions or retirement accounts.

What If I Live in a Community Property State?

Under law in certain states, any property that a couple acquires during their marriage belongs to both spouses. Currently, the community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these places, a property’s entire cost basis steps up in basis when one of the spouses dies. This can prove beneficial for the surviving spouse if, for example, the value of the property has greatly appreciated in the years since the initial purchase.

If you live in a community property state, be sure to work on your estate plan with a local attorney. You want to consult with someone who has knowledge of the rules specific to your state.

Meet With an Estate Planning Attorney

To understand the tax consequences of selling property after the death of a spouse, contact a qualified attorney. With their support, you can avoid delaying estate planning tasks and deadlines that will need tackling in a timely manner. In addition, they can assist you in connecting you with accountants, financial advisors, and even funeral homes. You may also work with them to re-evaluate your estate plan or navigate the probate process if necessary.

The rules are inherently complex, and amid your grief, you certainly do not have to manage these kinds of tasks on your own. Find an estate planning attorney near you today so that you can make well-informed decisions during this painful time.

For additional reading, check out the following articles:

• Estate Planning for Surviving Spouses
• Staying Eligible for Medicaid After the Death of a Spouse
• 5 Things to Know to Reduce Your Tax on Capital Gain
• What Will My Capital Gains Be When I Sell My Home?
• Pay Attention to Your State Estate Tax Exemption
• More Buyers, Older Adults Seeking Multigenerational Homes