Q:

Subject: Selling my home question

I read a recent article of yours relating to getting a $250 per person exclusion when selling your home. That was very informative, but I have an additional question. My wife died a couple of months ago. Can I claim two deductions if I sell my home in the same year that she passed away? I will be making more than $250K profit on my home and this might influence my decision to sell now or next year.

Thanks,

*** in PA

A:

 I'm sorry to hear of your loss. 

You do really need to be working one on one with a tax pro.  That is never a more important consideration than after a major life changing event such as you are going through.

To specifically apply the residence sale rules to your situation, there is a very big twist.  Essentially, there is no need to claim both of the $250,000 exclusions because your wife's half of the profit has already been wiped out.  When a person passes away, her heirs receive most of her assets at what is called a stepped up basis, which is the item's fair market value at the time of the person's death.  This means that all of the profits that had accumulated during her lifetime have literally been wiped off the books. 

What this means for you as the surviving spouse is that your personal cost basis in the home is now made up your half of the original basis (which is normally what you paid for it plus capital improvements) plus the new stepped up basis for the other half.  If you sell the home, that is what you would be using in the calculation of your profit.  You could then exclude up to $250,000 of profit on your 1040, assuming that you have been living there at least two out of the previous five years.  That exclusion amount would be prorated if  you have lived there less than two years.

Because PA is not a community property state, you only receive a stepped up basis on half of the home.  Surviving spouses in community property states actually have the total basis of their homes stepped up, effectively wiping out all of the accumulated capital gain.

Some assets don't have this new stepped up basis.  For example, most often pre-tax retirement accounts are still going to be subject to tax when you make withdrawals.  This is another reason why you absolutely must be working with a tax pro who can properly advise you on all of the tax twists that are now part of your world.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/02/2005 02:27:00 PM Send this post: