Capital Gains calculation on sale of house after spouse has died.

[pcsavant]

Asking question for mother in law. 

Her and her husband built their primary residence 20 years ago for about 200k. Her husband died 3 years ago. 

House is selling for $525k..of course there are closing and realtor fees. 

I read about the single and married capital gains deductions but wondered how the exception rules would apply here? 

I thought there was some math formula for calculating in this situation.

THANKS FOR ANY INFO!!!!!!!!!!😁

[Critter-3]

Simple ... first the original cost to build + improvements along the way = 200K  ... 100K basis per person.

Next the value as of date of death ... say it was 400K at that time ( $200 each) ... spouse gets a step up basis for the decedent's half  ...  so now the basis for the home is $200K + $100K = $300K

Last ... sell for $525K  -   ($300K basis + closing costs)  = $225 profit that can be fully excluded

If she gets a 1099-S for the sale then it must be reported on the return however the personal exclusion will negate any taxes. 

[Opus 17 · Accepted solution]

First, regarding the exclusion. Your mother in law can only claim a $250,000 exclusion of capital gains.  In order to claim a $500,000 exclusion that included her late spouse, she would’ve had to sell the home within two years of his passing.

The second issue is calculating the actual amount of capital gains.  Your mother in law’s basis is not the $200,000 purchase price. She received a stepped up basis when her spouse died. Calculating that basis depends on whether she lives in a community property state or not.

If the home is in a community property state, then she received a stepped up basis equal to the full fair market value on the day her husband died. To determine the fair market value three years ago, you can consult a real estate appraiser and they can create an estimate based on historical selling prices.

If the home is not in a community property state, then she received a partial stepped up basis equal to half the fair market value on the day her husband died. For example, when they bought the house, each of them had a cost basis of $100,000, or half the purchase price. Suppose that when your father in law died the home was worth $400,000. Your mother in law would receive a $200,000 basis on her husband‘s half of the home plus the $100,000 basis on her half of the home, for a total basis of $300,000. 

She can also include in the cost basis, some but not all closing costs from the original purchase and some but not all of the closing costs from the upcoming sale. The eligible costs are listed in IRS publication 523 on page 8.

She can also include in her cost basis, the cost of permanent improvements that were made to the home over the years. This is complicated by the stepped up basis calculation.  If the home is in a community property state and she received a full stepped up basis, then she can only include the cost of improvements made after her husband’s death.  If the home is not in a community property state and she received half the fair market value as a stepped up basis on her husbands half of the home, then she can add half the cost of permanent improvements made over the entire ownership period to her half of the original basis.

Once you have determined the entire adjusted cost basis taking everything into account, the first $250,000 of capital gains will qualify for the exclusion.