You will be limited to $250,000 of tax-free profit, not the full $500,000 a couple would get. By Kimberly Lankford, Contributing Editor October 29, 2007 My husband and I bought our house together in the 1980s. He died four years ago, and I'm now considering selling our house. Will my capital-gains exclusion be $250,000 because I file my taxes as a single now, or $500,000 because I originally bought the house with him? It seems unfair that I would have the smaller exclusion because he passed away.Because you do file as a single taxpayer, you will be limited to $250,000 of tax-free profit when you sell the home. But the taxable gain may be smaller than you imagine because part or all of the profit that built up while your husband was alive will be ignored by the IRS. When the owner of a home dies, the tax basis of the property -- the amount from which gain or loss is determined upon sale -- is "stepped up" to the date of death value. When a married couple owns a home jointly, at least half of the basis is stepped up (in community property states, the entire basis is stepped up). Here's an example of how it works, assuming you and your husband owned the home jointly in a state where half the basis was stepped up: Advertisement Assume you originally purchased the house for $50,000 (and didn't roll any profit from a previous home into the deal as was allowed under previous law). And, say the house was worth $150,000 when your husband died. The original $50,000 tax basis would be stepped up to $100,000 -- $25,000 (your share of the original $50,000) plus $75,000, which represents half of the home's value at the time your husband died. If you get $250,000 or less when you sell (after paying selling expenses), you'd owe no tax because the entire $250,000 profit would be covered by your exclusion. You can lower your tax bill even further by adding the cost of major home improvements and closing costs to your basis. For more information, see Taxes on Home-Sale Profits and IRS Publication 523 Selling Your Home. Got a question? Ask Kim at email@example.com.