My Spouse Died & I Want to Sell Our Home - What are the Tax Ramifications?

A significant percentage of married couples in New York own their home jointly with their spouse, usually as tenants by the entirety. This means that when one of them passes away, the surviving spouse becomes the 100% owner of the home automatically.  It is also not uncommon for the surviving spouse to consider selling the marital home at that time, whether to downsize or simply relocate.  However, there are some tax considerations that must be taken into account when making the decision to sell.

When selling any property, one of the biggest concerns is whether any capital gains taxes will be due upon the sale.  Capital gains are the difference between the property’s cost basis and its sale price (less any closings costs).  The basis is generally the original purchase price of the property plus any capital improvements.  For example, if you purchased a home for $250,000 and then later sold it for $450,000, you would have $200,000 of gains ($450,000 - $250,000 = $200,000). If you made capital improvements of $50,000, the gain would be $150,000.

Married couples who file their taxes jointly can sell their primary residence and exclude up to $500,000 of the amount they gained from the sale from their total gross income. This means that if they purchased a home for $300,000 and later sold it for $600,000, they would not be required to pay any capital gains taxes on the sale proceeds since the amount of gains falls below $500,000. Further, a single person may exclude up to $250,000 of gains from the sale of their primary residence.

A surviving spouse may exclude the full $500,000 if they sell their primary jointly owned residence within two (2) years of the date of their spouse’s death and if other ownership and use requirements have been met.  This means that, generally speaking, a widow or widower who sells their home within two years of their spouse’s death may not need to pay capital gains tax on the sale of their home.

If a widow or widower waited more than two (2) years after the death of their spouse to sell their home, they may exclude only $250,000 of capital gains from the sale.  However, they do not automatically owe taxes on the rest of the gains.  This is because when a property owner dies, the cost basis of the property is “stepped up” to the current market value of the property.  The current market value can be determined by a qualified real estate appraiser.

When a joint owner of a property dies, half of the property’s value is stepped up to the current market value.  Consider a married couple who purchases a property for $200,000 and when the husband later dies, the property has a fair market value of $300,000.  In this case, the new cost basis of the property, if the wife were to sell, is $250,000.  This is calculated based on the $100,000 for the wife’s original 50% interest (one-half of the original purchase price of $200,000) and $150,000 which is one-half of the stepped-up value attributable to the husband.

The step-up in basis is a valuable tool for a widow or widower who may not be quite ready to sell their marital home within two (2) years of their spouse’s death.


This article is for educational purposes only - to provide you general information, not to provide specific legal advice.  Use of this post does not create an attorney-client relationship and information contained herein should not be used as a substitute for competent legal advice from a licensed attorney in your state.


 

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