Capital Gains Exclusion For Surviving Spouse:

My wife and I are elderly. We have owned and lived in our home 38 years. It is now worth more than $500,000. We know if we sell, we can claim that $500,000 exemption you often discuss. However suppose one of us dies before the home is sold. Would the surviving spouse lose the $500,000 exemption? Is there a time limit after the death of a spouse where the survivor can still claim the $500,000 exemption?

The $500,000 married filing jointly principal residence sale tax exemption of Internal Revenue Code 121 is available until the end of the tax year when a homeowner spouse dies. After that tax year, the exemption reverts to $250,000, which is available to single persons who owned and occupied their principal residence at least two of the five years before its sale. This presumes the deceased spouse left his/her half of the home to the surviving spouse, and then the surviving spouse received a new stepped-up basis to market value on the date of the deceased spouse's death. If the home is in a community property state, the surviving spouse receives a 100 percent stepped-up basis.
But in other states, only 50 percent of the home's market value is stepped up when one spouse dies and leaves his/her half to the survivor. For full details, please contact your tax adviser.

Contact your Tax Professional for more information.

The information provided is not intended as legal or tax advice and may not be relied on for purposes of avoiding federal tax penalties. All individuals, including those involved in a real estate transaction, are advised to meet with their tax and legal professionals.


(Information found at | Contact your Local County Tax Assessor for more information.