Normally, married couples own a home as joint tenant with rights of survivorship. When a spouse dies, the surviving spouse inherits the home and it does not trigger a taxable event. Unfortunately however, the capital gain exclusion is reduced to a single person’s share unless the survivor disposes of the property in the granted time.
When it comes to capital gain, married couples, filing jointly, have up to $500,000 of capital gain exclusion on qualifying sales. Since a surviving spouse is a single taxpayer, they are only entitled up to $250,000 exclusion of capital gain. For instance, if the home at the time of death is worth $900,000 with a basis of $400,000, the gain is $500,000. If the surviving spouse sells the home, their exclusion is only a maximum of $250,000 which would make the other $250,000 subject to long-term capital gains tax.
There is an exception to that rule however. If a sale occurs within two years of the death of their spouse, the survivor is entitled to the $500,0000 exclusion if the ownership and use tests are met prior to the death. The two-year period begins on the date of death and ends two-years after that date which means the property needs to close and fund by that anniversary.
For more information contact your tax professional and download IRS Publication 523 and download the Homeowners Tax Guide.
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