Taxes After a Death
Q: What happens when a couple is eligible for a tax-free gain of $500,000 on the sale of a house, but one spouse dies before the home is sold? Is the tax-free gain then reduced to only $250,000? That doesn’t seem fair if the couple has lived there for several years and the spouse dies shortly before the sale.
A: You are entitled to exclude $250,000 of the profit on your tax return if you are a single filer, or $500,000 if you file a joint return. To qualify, you must meet certain Internal Revenue Service criteria, naturally, especially the “ownership and use” tests. To pass those tests, you must have owned and used the house as your primary residence for at least two of the five years before your date of sale.
If you sell your home after a spouse dies and file a joint return that same year, you can claim the full $500,000 exclusion as long as the ownership and use tests are met. You can find other details, including instructions on calculating your gain, in IRS Publication 523, which can be found on the IRS Web site: www.irs.gov
EXCERPT FROM February 2005 Money Adviser - Consumer Reports