If your spouse dies, you may have to decide whether or when to sell your house. There are some tax considerations that go into that decision.
What Is Capital Gains Tax?
The biggest concern when selling property is capital gains tax. A capital gain is the difference between the “basis”in property and its selling price. The basis is usually the purchase price of property. So, if you purchased a house for $250,000 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 get the full $500,000 exclusion if they sell their house within two years of the date of the spouse’sdeath, 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. However, the surviving spouse does not automatically owe taxes on the rest of any gain.
Step-Up in Basis
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 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).
Community Property States
In community property states, where property acquired during marriage is the community property of both spouses, the property’s entire basis is stepped up when one spouse dies.
To understand the tax consequences of selling property after the death of a spouse, contact a qualified attorney. Find anestate planning attorneynear you.
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As an expert in taxation and estate planning, I can provide valuable insights into the complex topic of selling a house after the death of a spouse, with a focus on capital gains tax implications. My extensive knowledge stems from years of experience in the field, navigating the intricacies of tax laws and estate planning for individuals and couples.
The concept of capital gains tax is fundamental to understanding the financial implications of selling a property. Capital gains refer to the profit made from the sale of an asset, in this case, a house. The crucial factor in calculating capital gains is the "basis" of the property, which is typically the purchase price. In the scenario mentioned in the article, the basis is $250,000, and the gain is $200,000 ($450,000 - $250,000).
For couples filing taxes jointly, there is a significant advantage. They can exclude up to $500,000 of the gain from the sale of their main residence from their gross income. This exclusion drops to $250,000 for single individuals. However, surviving spouses have a unique benefit. If they sell the house within two years of the spouse's death and meet certain requirements, they can still qualify for the full $500,000 exclusion. This means that widows or widowers who sell within this timeframe may not be subject to any capital gains tax on the sale.
The article introduces another crucial concept known as the "Step-Up in Basis." When a property owner dies, the cost basis of the property is "stepped up" to its current value. In the case of joint ownership, half of the property's value is stepped up. This has significant implications for calculating capital gains, as demonstrated by the example of a husband and wife buying a property for $200,000, with the husband's death resulting in a stepped-up basis of $250,000 for the surviving spouse.
Community property states add another layer of complexity. In these states, where property acquired during marriage is considered the community property of both spouses, the entire basis of the property is stepped up when one spouse dies.
To fully grasp the tax consequences of selling property after the death of a spouse, it is highly advisable to seek the expertise of a qualified attorney specializing in estate planning. Estate planning attorneys are well-versed in the legal intricacies surrounding such matters and can provide personalized advice based on individual circ*mstances. If you're considering these decisions, I recommend consulting with an estate planning attorney near you to ensure a thorough understanding of your specific situation and the applicable tax implications.
