Capital gains on the sale of a house

[Deb1953]

My husband and I bought a home together in 2007. In 2013, we changed title to a revocable living trust, with the two of us as trustees. The home has appreciated a great deal.  My husband died in June of 2022 and I will probably sell the home within the next year.  I reside in Colorado.  I believe I can take 1/2 of the FMV as of the day of his death as a "step up".  Do I also receive his $250K exclusion as long as I sell the house within 2 years of his death?  When figuring the capital gains, I have kept good records of all improvements, can I deduct all of these, or only 1/2 of the amount as "my" portion  of the contribution since I will have the step up.  I cannot find any sort of form or worksheet to plan ahead for these issues.  Thank you for any guidance.

[DavidT0202]

Hi @Deb1953 

I am sorry to hear about the loss of your spouse.  Losing a loved one is never easy.

Surviving spouses get the full $500,000 exclusion if they sell their house within two years of the date of the spouse's death, and if other ownership and use requirements have been met. The result is that widows or widowers who sell within two years may not have to pay any capital gains tax on the sale of the home.

If it has been more than two years after the spouse’s death, the surviving spouse can exclude only $250,000 of capital gains. However, the surviving spouse does not automatically owe taxes on the rest of any gain. 

When a property owner dies, the cost basis of the property is "stepped up." This means the current value of the property becomes the basis. When a joint owner dies, half of the value of the property is stepped up. For example, suppose a husband and wife buy property for $200,000, and then the husband dies when the property has a fair market value of $300,000. The new cost basis of the property for the wife will be $250,000 ($100,000 for the wife's original 50 percent interest and $150,000 for the other half passed to her at the husband's death). In community property states, where property acquired during marriage is the community property of both spouses, the property’s entire basis is stepped up when one spouse dies. 

In conclusion, The Stepped up rule and the exclusion are both in play in your case.  If you sell the property within 2 years, you will be able to exclude the full $500k of the sale from your income. 

Thank you for choosing TurboTax, best of luck to you.