2-yr limit to sell house after spouse passes to use spouse's $250k capital gains exclusion

[memorris7]

Is the 2-year limit an exact 24 months from the date of death of the spouse for the home sale to close or is it 2 calendar years?

Example:  spouse passed 10 April 23 

1. Does home sale have close NLT 10 April 25 - exactly 2-yrs from date of death?

2. Or does home sale have to close NLT 31 Dec 25 (by the end of the 2nd tax year)?

Can't find the specific answer in Publication 523-Surviving Spouses:

It says this below - but does not specifically say within 2 years from the date of death - I think that is what it means but need to know the last date the house could be sold (helping a friend who lost their spouse in early 2023 and I think time is running out to get it on the market if it is 24 months) 

Also, you may be able to increase your exclusion
amount from $250,000 to $500,000. You may take the
higher exclusion if you meet all of the following conditions.
1. You sell your home within 2 years of the death of your
spouse;

[rjs]

The limit is 730 days. Don't cut it too close. You don't want your friend to have to haggle with the IRS over a question of a day or two. And house sale closings are often delayed.

[VolvoGirl]

I don't know how all that works but my husband died in March 2023 too.  I got a full step up in value on his date of death so the 250/500,000 exclusion doesn't matter to me anymore unless it goes up another 250,000 before I sell.  I'm in California so it might be different.  

[rjs]

To answer your question more specifically, the sale would probably have to close no later than April 9, 2025, or maybe April 8. But as I said, don't cut it that close.

VolvoGirl got stepped up basis on the full value of her home because she lives in California, which is a community property state. If your friend is not in a community property state (or if the house was not held as community property) then the surviving spouse will only get stepped up basis on half the value. Their basis in the other half remains the same as it was before the other spouse's death. If the couple bought the house together, the surviving spouse's basis in their half is probably half of what the couple paid for the house, plus half the cost of any improvements.

[Opus 17]

2 years means 365 x 2 = 730 days.

When the IRS means "the end of the second calendar year" they say so.  Not in this case. 

Note that even if the widowed spouse waits more than 2 years, they have a stepped up basis on at least part of the house, that will reduce their capital gains even if they miss the exclusion window.  Basis is discussed in publication 523, including certain adjustments to basis that will reduce the taxable gain, even if the exclusion is available.

https://www.irs.gov/forms-pubs/about-publication-523

[memorris7]

thanks for the exact answer, just what I was looking for. Hard when a spouse is lost suddenly, to ask the surviving spouse to think about selling the only home they have ever lived in to avoid a large tax bill on capital gains. But their financial situation requires they take this into consideration. 

[memorris7]

unfortunately for the widow, they only put her name on the deed when it was purchased even though they were married at the time. So, she can't get spouse's step-up basis as he had no ownership in the property. They don't live in a community property state. 

[Opus 17]

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@memorris7 wrote:

thanks for the exact answer, just what I was looking for. Hard when a spouse is lost suddenly, to ask the surviving spouse to think about selling the only home they have ever lived in to avoid a large tax bill on capital gains. But their financial situation requires they take this into consideration. 

---

That is probably not the only answer.  First, remember the stepped-up basis.  Second, if the spouse wants and is able to keep living in the house, the house can be placed in an asset protection trust, and if the house passes to their children after they die, they get a fully stepped up basis and owe no tax on sale.  Third, the spouse still needs someplace to live, and if you think about rent, or a new mortgage, it may not actually make financial sense to force them out of their current house just to save 15% cap gains tax on half the gain minus $250,000.  Lastly, the house is an investment--not diversified or very liquid, but it does count as an investment.  If they sold, where would they put their money and would it earn more and be as safe as the house? 

I think you should discuss this with a certified financial planner, or if the person is over 65, a financial planner or law firm that specializes in Elder law and financial planning.  Don't make your decision just based on one assumption and one calculation. 

[memorris7]

thanks - do you mean certain expenses that increase basis (new roof, new bathroom, etc.)? There has been virtually no investment into the home and said they never kept receipts for anything. The house is over 100 yrs old and in need of significant work. And since home was bought in wife's name and husband was never added, not eligible for his half step-up basis. 

I have read this publication and the basis section several times, am I missing something she might be eligible for to increase/step-up her basis?  Capital improvements and deceased spouse step-up are the only 2 I can think of that would apply but looks like she can't use either. 

Thank you!

[memorris7]

All excellent points that I am working on with her:

1.  Have 3 meetings set up for her next week to find a fiduciary CFP, brokerage firm & estate planning attorney

2.  Home is >100 yrs old and in need of very substantial repairs that would be extremely expensive (virtually nothing has been done other than emergency repairs over the many years they owned the home due to financial constraints). Staying may not be an option and the real estate market where she lives is on fire right now, might be the best opportunity to get a good price and quick sale.

3.  Reinvesting proceeds to part of financial plan from meetings above. Best likely option is to downsize to condo.

Thanks for taking the time share these insightful comments

[Opus 17]

@memorris7 

Good luck.  Taxes should never be the deciding factor in a long term financial plan that is needed here.  At most, it would be an equal factor along with asset protection, future investments, and future living arrangements that are secure (affordable for her or paid up).