I am so sorry for your loss.
I assume by "just bought a new home" that you had not owned and lived in the home for 2 years, so you are worried that you do not get to use the exclusion rules for any gain on the house. Sadly, that is correct.
As a recent widow, you have one more card to play to beat capital gains tax. In all likelihood, you and your husband owned your home jointly (both of your names were on the deed) or there was a built-in right-of-survivorship. What this means is that when your husband died, his half of the home went to you.
Something else happened during that transfer that most homeowners don’t realize. Your husband’s half of the home transferred to your ownership on a stepped-up basis. When he died, his portion of the house updated (or stepped up) to the current fair market value of the home.
In our example, you purchased your home with your husband for $300,000. Let’s say that on the day your husband died, your home was worth $550,000. When his half of the home transfers to you, it isn’t worth $150,000 (half of your original purchase price); rather it is worth $275,000 (half of the current fair market value of $550,000). When you sell your home next year for $600,000, the capital gain is NOT $300,000. It is $175,000. How did we come up with that number?
Your half of the house is still at its original tax basis of $150,000 (half of the original $300,000 purchase price), but your husband’s half of the house stepped up to $275,000 when he died (half of the house’s value on the day he died of $550,000). Add $150,000 to $275,000, and you get $425,000 as the tax basis of your home. Subtract $425,000 from the $600,000 sales price, and your capital gain on the sale is $175,000.
Many widows do not know about this rule, and so they don’t report the stepped-up value from their husband’s portion of the house when they sell the house. Don’t make this mistake. It could mean the difference between paying a big capital gains tax on the sale of your house or paying nothing at all!
Hopefully, this rule will help you avoid most or all of the capital gains on the sale.
You will need to adjust your basis in the home to the stepped-up amount when you enter its value. Good luck.
