Home-Sale Profit Rules for Widows And Widowers

A sale by year-end could double the amount of profit that is tax-free.

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One of the greatest tax breaks for homeowners -- in addition to the one that allows you to deduct property taxes and mortgage interest -- is the ability to claim tax-free profits on the sale of your principal residence. Individuals can take up to $250,000 of profit tax-free, and married couples filing jointly can get a cool half million when they sell a house that they lived in for at least two out of five years prior to the sale.

A recent change in the law provides a special rule for widows and widowers.

Previously, a surviving spouse could claim the full $500,000 exclusion only if the home was sold in the year that a joint return was filed, which generally is limited to the year the spouse dies. But now a surviving spouse may exclude up to $500,000 of profit from the sale of the principal residence if it occurs within two years of the spouse’s death.

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For example, if your husband died in 2007 and you sell the house that the two of you shared by December 31, 2009, you will be able to exclude up to $500,000 of profits from taxes. If you wait until next year or later to sell the house, you will be able to exclude only half of that amount -- up to $250,000 in profits -- from taxes.

Whether rushing a sale by year-end would benefit you depends on a lot of things, particularly on how much profit you expect to reap. And remember this: If your late spouse jointly owned the house with you, at least half of the gain accumulated up to the time of his or her death became tax-free at that time. That increases your tax basis -- the amount from which gain or loss on a sale will be determined -- and thus reduces your profit on any sale.

A recent change in the law provides a special rule for widows and widowers.

Previously, a surviving spouse could claim the full $500,000 exclusion only if the home was sold in the year that a joint return was filed, which generally is limited to the year the spouse dies. But now a surviving spouse may exclude up to $500,000 of profit from the sale of the principal residence if it occurs within two years of the spouse’s death.

For example, if your husband died in 2007 and you sell the house that the two of you shared by December 31, 2009, you will be able to exclude up to $500,000 of profits from taxes. If you wait until next year or later to sell the house, you will be able to exclude only half of that amount -- up to $250,000 in profits -- from taxes.

Whether rushing a sale by year-end would benefit you depends on a lot of things, particularly on how much profit you expect to reap. And remember this: If your late spouse jointly owned the house with you, at least half of the gain accumulated up to the time of his or her death became tax-free at that time. That increases your tax basis -- the amount from which gain or loss on a sale will be determined -- and thus reduces your profit on any sale.

Mary Beth Franklin
Mary Beth Franklin
Former Senior Editor, Kiplinger's Personal Finance
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