Long-term capital gain on home sale after spouse dies

First, I'm sorry for the sad news. Behind the numbers is an awful personal situation. Your friend should be able to take advantage of a stepped up basis as follows: House cost: $200,000 (for example) Sales price: $900,000 (to get to $700,000 gain)

Wife's half - gets stepped up to $450K current value upon her passing. Friend has basis of $450 + 1/2 ($200K) = $550,000

He then has his $250K exclusion, total $800,000 of sale not taxed. His net taxable gain is $100K.

(If he sells it the same year she passes, he may get her $250K exclusion as well. That's a point I am unclear on, as it seems to be 'double-dipping') JOE

In the year his wife dies, he will file a joint return and will be able to take the full $500K exemption. If he sells the house after the end of the year she dies he only gets his $250K exemption. However, he gets a "stepped up basis" on the house on the date of her death which would eliminate the full gain to that date in a Community Property State, and 1/2 the gain if the house is held in joint tenancy in a non-Community Property State. If held soley in her name...full step up. If held soley in his name, no step up. ed

It depends.

(My most often used response)

There will be a step up in basis upon her death. If this is a community property state, and the home is community property, the step up will be 100% FMV on date of death. If Separate property, her half will receive the step up.

If the house is sold in the year of death then the step up applies and in addition they receive a 500000 exclusion on their joint tax return.

If sold in a year after death, a 250,000 exclusion applies, after applying the step up.

-- ArtKamlet at a o l dot c o m Columbus OH K2PZH

n3wsr3ad3r_|@|_sbcglobal.net (BE) posted:

As they've owned the home together, if/when your friend's wife dies, he will inherit her basis at date of death, usually (assuming he's her heir, which is normal), so the math will take care of $350,000 of that profit -- leaving him with $350,000 ($250,000 tax-exempt). That's not so bad. Also, if she were to die in January, he'd have that complete calendar year to sell and the home profit treatment would be for MFJ. Either way, it would seem he shouldn't add that worry to his burden. Bill

I will assume that this couple does not live in a community-property state and that the house is jointly-owned. The results may differ if that is not true. Scenario 1 - If the house is sold prior to the wife's demise, there may be a gross profit of $700,000 (as stated). The couple would get an exclusion of $500,000 of gain, and owe LT capital gains tax on $200,000 (or less if there are significant selling expenses). Scenario 2 - Wife passes away and house is put up for sale (or unsold from a prior listing), and sells for $700,000 gross profit. Taxwise, several things can happen:

2A - If sale occurs in the SAME calendar/tax year, the surviving spouse can claim an exclusion of up to $500,000 if he files a Married/ Joint return. In addition, the cost basis of the decedent's half of the house is increased by $350,000, which should reduce the gross profit on sale to less than $500,000. This would result in NO capital gains tax being due. 2B - If the sale is concluded in a later year, the surviving spouse can claim an exclusion of up to $250,000. The $250,000 exclusion from the decedent is no longer available. Since the cost basis of the decedent's half of the house has been increased by $350,000 (and now belongs to the surviving spouse) the taxable gain will be reduced substantially. The actual amount taxable would depend on selling costs (i.e. commission, etc) and the original cost basis for the husband's half.

If your friend's wife is an owner of the home then there will be a step up in basis to fair market value for at least half the interest in the home. Using your numbers there will only be about a $350,000 gain when your friend sells. Additionally, if your friend sells in the same tax year as his wife dies then he can file a joint return and use the $500,000 exclusion.

The surviving spouse gets an untaxed stepup in value to fair market value on half the house if not in a community property state and on all in community property states that I can think of. You need to determine what your state law says. Based on a present $700,000 value above basis, this actually saves tax on $100,000 if not community property and avoid taxing even the excess $200,000 in specific community propery states. Depending on the value of the estate, the stepup could cost estate taxes. I would advise your friend to seek council from a good tax attorney to see if any steps are available to minimize or eliminate federal income or estate taxes. Mike

He will probably not have to pay any taxes or even report the sale because he will get his wife's stepped up basis for her half of the property.

If he sells the house after the year in which his wife dies, he will be able to exclude only $250,000. However, if they own the house jointly, his gain will not be $700,000. He will get a stepped up basis for his wife's half of the house. The basis for her half will be the market value on the date of her death. So if he sells shortly after she dies, there will be little or no profit on her half. His profit will be in the neighborhood of $350,000. After the $250,000 exclusion he would have a taxable gain of about $100,000. If they were to sell the house now, they would get the $500,000 exclusion, but would have the full $700,000 gain. So the taxable gain would be about $200,000. Assuming that the 15% tax rate on long-term capital gains would apply in either case, if his wife dies before the house is sold your friend would "lose the chance to take the $500,000" exclusion, but would pay half as much tax. The step-up of basis would eliminate $350,000 of taxable gain, while the double exclusion would eliminate only $250,000. If he sells the house in the same year that his wife dies, he will still be filing a joint return with her for that year (assuming he doesn't remarry in that year). In that case, he apparently would get both the stepped up basis on her half of the house (if it is owned jointly) and the $500,000 maximum exclusion, leaving him with no taxable gain. I recall some discussion about this situation not too long ago, in this or some other online forum. If I recall correctly, that discussion concluded that this is how it would work. Of course, depending on how close to the end of the year his wife dies, it might not be possible to sell in the same year. You didn't say whether they live in a community property state. I don't know how that might affect the situation. Obviously this is a potentially complex situation, and there may be important details that you haven't given. With a house that is worth $700,000 plus whatever they paid for it

30 years ago, I suspect that this couple may have other substantial assets. Your friend and his wife should consult a local lawyer who has experience handling estates, and a local tax professional (those are two different people), to discuss their entire financial situation. Bob Sandler

My question in this situation is could the husband give his terminally sick wife his half of the house. Then upon her death the entire house would get stepped up value and no taxes would be due upon immediate sale. This, of course, requires fully trusting the dying wife not to change her will. Would this also work with other assets, such as stocks, bonds, vacation house, etc (excepting insurance which would have a 3 year look back)

-Bill (not the active bill brown in this group!)

Or, in this instance, appreciated property that you gave to the decedant, which ha a one-year lookback.

See 2006 IRS Publication 550, page 43, third column.

If within the one year lookback you gave appreciated property to the decedant, and inherited it, your basis is not FMV on date of death; it is decedant;s basis, hich of course is your basis. So this scheme does not work.

-- ArtKamlet at a o l dot c o m Columbus OH K2PZH

What if they also own some other property, worth the same as the house, but without any appreciation? Can he trade her half of that property for his half of the house? For that matter, can he sell her his half of the house for FMV? (Would that get the $500,000 exemption because he files joint?) Seth