September 10th, 2018 at 10:04 pm

Fact Pattern: Henry and his wife, Wendy, purchased a home together about 40 years ago for $200,000. The home has always been their primary residence. It is now worth about $1.2 million. Unfortunately, Henry died. Because Henry and Wendy held title together as joint tenants, not community property, only the tax basis of Henry’s 50% share was stepped up to fair market value upon his death. Hence, if Wendy sells, she may be facing capital gains of roughly $500,000. That amount was simplistically calculated based on a $1,200,000 sales price minus a stepped-up $600,000 tax basis for Henry’s 50% share and a $100,000 tax basis for Wendy’s 50% share.

Multiple Choice Question: If Wendy now sells her home, how much can she exclude from capital gains tax? Pick the best answer:

A. $250,000.
B. $500,000 if Wendy sells within the same calendar year that Henry died.
C. $500,000 if Wendy sells within 2 years after Henry’s death.
D. $500,000, regardless of when Henry died. 

Answer: Before you dismiss this question as being too technical, keep in mind that knowing the answer may help you get a listing from someone in Wendy’s situation. As a general rule, an individual taxpayer can exclude from income tax up to $250,000 in capital gains for a property he or she has owned and occupied for at least 2 of the last 5 years. That amount is doubled to $500,000 for a married couple. But there’s a special rule if a spouse dies. Answer B used to be the law 11 years ago, even though it was shockingly unfair to people with spouses who died towards the end of the calendar year. Answer C is the correct answer, as long as Wendy has not remarried at the time of the sale.

This scenario may not come up very often. However, when it does, knowing that a surviving spouse only has 2 years after the spouse’s death to take advantage of the $500,000 capital gains tax exclusion should help you convince the owner to hurry up and list with you right away!

-Thank you to Karen Heyrend (Ventura Office) for suggesting this week’s legal tip.

Copyright© 2018 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of September 10, 2018. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals.

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