Home sale exemption? ? ?

************> 121 Exclusion

Section 121 of the Internal Revenue Code, which is often referred to as the

121 exclusion, generally allows homeowners to sell real property held (owned) and used (lived in) as their primary residence and exclude from their taxable income up to $250,000 in capital gains per homeowner, and up to $500,000 in capital gains for a married couple filing a joint income tax return.

Primary Residence

The 121 exclusion can only be used in conjunction with real property that has been held and used as the homeowner's primary residence. It does not apply to second homes, vacation homes, or property that has been held for rental, investment or use in a trade or business.

In the event one spouse dies, and Sec 121 is otherwise met, the surviving spouse has two years from date of death to sell and claim the full 500,000 after accounting for step up.

So surviving spouse may file Single and still claim the 500,000 amount.

Thanks for the responses.

The property has been primary residence for 33 years. Purchase price was $135,000. Improvements $50,000. Jointly owned until husband's death in 1981. Widow has lived there continuously since that time.

Her gain less exclusion of $250,000 is long term taxable gain.

Her gain is her sales price less (adjusted cost basis plus improvements).

Adjusted cost basis depends on whether this is a community property state or not. If a community property state, the cost basis is stepped up to the market value on date of husband's death. Otherwise half the cost basis is stepped up and the other half is based on the original cost. Add improvements to cost depending when they ocurred.

If she can afford to take back the mortgage and treat this as an installment sale, she pays tax on the gain only as she receives it over time.

Long term gain rates are likely to go up, so that's another consideration.

The AMOUNT of the step-up is affected by the community property status of the state. The fact that there is a step-up occurs regardless of the type of state:

Community property: 100% revaluation in 1981. Adjustments before the death date are ignored. Statutory property: 50% revaluation in 1981 + 50% of existing adjusted basis (as of 1981). [NOT necessarily original cost]

Thanks -- that tells me what I needed to know, which is that she is a far better candidate for a reverse mortgage or standard homeowners' loan with the idea of passing on the house to her heirs.

-- Ray