Sale of home - step up question

Assuming the widow is filing a joint return with her deceased husband and that the sale was finalized in 2006, she is entitled to exclude up to $500,000 of profit. It sounds like you're familiar with the applicable basis step-up rules, but just to cover all the bases, if the spouses were domiciled in a community property state and had designated their joint interest as community property, the surviving widow gets the basis stepped up to the full fair market value (FMV) on the date of her husband's death.

At least. Depending on the ownership form there may be a

If it's a joint return and one of the couple meet the ownership test and both meet the primary residence test then the exclusion is $500,000.

If the home is sold in the year of death, you get both: the step-up in value of 50% (100% in CP states) and the full $500K gain exclusion. If sold in a subsequent year, the exclusion drops to $250K. Ira

Who is WE? If the house was sold in 2006 and the surviving spouse files a Married Filing Joint return (with the decedent), the full $500,000 exclusion can be claimed. If the widow remarried in 2006, she is limited to a $250,000 exclusion and the decedent's exclusion is lost (cannot be claimed on his final return). Unless she lives in a community-property state, the basis adjustment is limited to the decendent's half of the house. The widow's half does not change.

To claim the $500,000 exclusion when filing MFJ you must be married AND file a joint return. As of Dec 31 of the tax year the widow is not married. She can claim her own $250,000 exclusion and benefits by the increase in basis for the portion of the home she inherited.