Paying Taxes on a Home Sold After a Spouse's Death

Question: My husband died last year, and I’m selling our home. Do I still get to exclude $500,000 of home-sale profits from taxes, or am I limited to the $250,000 exclusion for singles?

Answer: Surviving spouses may exclude $500,000 of home-sale profits from taxes if they sell the house within two years of their spouse’s death, as long as they owned and lived in the house for two of the five years before the spouse died.

If more than two years have passed, then no more than $250,000 of the profit is tax-free. But assuming you and your husband owned the home jointly, you may not have as much taxable gain as you think. In the case of joint ownership, part of the tax bill was automatically forgiven when your husband died because at least half of the property’s basis was stepped up to its value on the date of his death.

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In most states (but not community-property states), half of the property will receive a step-up in basis. If you and your husband purchased the house jointly for $200,000 many years ago, for example, and it was worth $500,000 when he died, then your basis would now be $350,000 – your half of the original $200,000 basis plus your husband’s half of the date-of-death value.

If you live in a community-property state, then the entire basis is stepped up to its value when the first spouse dies, says Mark Luscombe, principal analyst for tax and accounting at tax publisher Wolters Kluwer. In the example above, the basis would become $500,000. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community-property states.

The cost of any major home improvements you made while you owned the house also add to the tax basis. See IRS Publication 523, Selling Your Home, for more information about the calculations and the expenses that can be added to your basis.