spouse's death

A Spouse’s Death Can Have These Tax Consequences When Selling Your Property

In many cases, a spouse’s death becomes a deciding factor whether or when to sell your house. But before listing it on the market, here are some tax considerations that you should take into account when making that decision. 

What is Capital Gains Tax?

The biggest concern when selling property is Capital Gains Taxes.  

A capital gain is the difference between the “basis” in property and its selling price. The basis is usually the purchase price of the property. So, if you purchased a house for $250,000 (basis) and sold it for $450,000 you would have $200,000 of gain ($450,000 – $250,000 = $200,000).

Couples who are married and file taxes jointly can sell their main residence and exclude up to $500,000 of the gain from the sale from their gross income. Single individuals can exclude only $250,000.

Surviving Spouses Have A Limited Time For CGT Exclusion

Surviving spouses get the full $500,000 exclusion if they sell their house within two years of the date of the spouse’s death and if other ownership and use requirements have been met. The result is that widows or widowers who sell within two years may not have to pay any Capital Gains Tax on the sale of the home.

If it has been more than two years after the spouse’s death, the surviving spouse can exclude only $250,000 of capital gains.

Conditions Where A Surviving Spouse May Not Owe Taxes On The Rest Of Any Gain 

When a property owner dies, the cost basis of the property is “stepped up.” This means the current value of the property becomes the basis.

When a joint owner dies, half of the value of the property is stepped up. For example, suppose a husband and wife buy property for $200,000, and then the husband dies when the property has a fair market value (FMV) of $300,000. The new cost basis of the property for the wife will be $250,000 ($100,000 for the wife’s original 50 percent interest and $150,000 for the other half passed to her at the husband’s death).

In community property states – such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin – property acquired during marriage is the community property of both spouses. The property’s entire basis is stepped up when one spouse dies.  In the above example, the FMV of $300,000 becomes the new basis of the property.  When the second spouse dies, the basis is again stepped-up.  For example if, the value of the property at the wife’s death is $450,000, that becomes the new basis.  This is what we call the double step-up in basis.  This basis increase translates into a significant tax benefit for your heirs.

Understanding The Tax Consequence Of Selling Property

The timing and State of residence are not the only factors that can affect taxes when selling property after a loved one’s passing.

To understand more about the tax consequences of selling property after the death of a spouse, contact your attorney. 

How The Law Office of Antoinette Bone Can Help

At the Law Office of Antoinette Bone, our practice is focused in the areas of Probate, Estate Planning, Elder Law, and Guardianship. We understand that no two family or personal situations are the same – that’s why we take a personalized approach with all of our clients.

Let us guide you through this process. Click the link to book an appointment or call us at (817) 462-5454 to schedule a meeting with Antoinette Bone in our Euless, Texas office.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Nothing in this message is intended to provide legal advice.  This message is for educational purposes only.