Home Sale Capital Gains tax exclusion for Widow?

[sgoudeau]

If a widow sells their joint home 3 years after their spouse passed and they live in a community property state (Louisiana), how does the step-up basis work?  How long can it be used?  Is the FMV determined at the time of the spouses death?

[Opus 17]

There are a couple of issues.

1. If you live in a community property state, the surviving spouse receives a fully stepped up basis equal to the fair market value on the date of the spouse's death.  This may need to be determined by appraisal.  The basis is the spouse's new basis, and does not expire.

2. If the surviving spouse sells the house in 2 years or less, and has not remarried, they can claim an exclusion of the first $500,000 of capital gains.  If more than 2 years has passed, they claim an exclusion of $250,000.  (Possibly $500,000, if they have remarried and the new spouse has lived in the home more than 2 years and has not used their own exclusion in the past 2 years.)

3. However, the amount of capital gain that is subject to tax is only the increase in value since the stepped up basis as of the spouse's death.

For example,

You bought the home with your spouse in 2000 for $200,000.  Your spouse died in 2021 and the FMV of the home at that time was $500,000.  You sell in 2025 for $700,000.  Your capital gain is $200,000.  As long as you lived in the home as your main home for more than 2 out of the previous 5 years, you can exclude the first $250,000 of gain from your taxable income.  Since the gain is less than the exclusion, the gain is not taxable. 

[Bsch4477]

When a spouse dies in a community property state, the surviving spouse receives a full step-up in basis on both parts of any jointly owned assets, including the home. This means that the cost basis of the asset is adjusted to its fair market value at the time of the death.

[Tom5719taxNegele]

using the example, let's say the house sells for 1,100,000? This would fall outside the 250,000. what would be the calculated cost process? please elaborate, as I need to substitute my real numbers for this years tax filing.

Thank You

[AmyC]

The $250,000 exclusion is based on the gain. Selling price of the house minus (what you paid /or cost basis plus improvements).

• If you are in a community property state, your cost basis is adjusted as mentioned above. 
• If not, the basis is calculated for each of you. For example:
  • Purchase for $500,000, each of you have basis of $250,000
  • Improve the house $100,000, each of you have basis plus improvement of $300,000 ($600k combined)
  • Spouse dies, house worth $1M - spouse half of house now has a basis of half a million (instead of the $300k) for the inheritor(s) to use.

If the spouse inherits that half of the house:

• inherited value $500,000 from deceased
• plus owner's basis from above of  $300,000 
• has a new basis of $800,000. 
• Sell for $1.1M, 
• gain of $300,000 
• minus the $250,000 exclusion
• leaves a taxable gain of $50,000.