Home Sale Capital Gains tas exclusion for Widow?

[Lennyb08]

Hello,  my mother has been a widow for 25 years, and has recently sold her home.  Her husband lived in the home with her for 21 years before his death.  She continued to live in the home until now, 2023.  When she files her taxes for 2023, will she qualify for the $500,000 capital gain tax exemption, the $250,000 exemption, or something in between?

Looking forward to some help in this matter.  Thanks in advance for the advice.

[NCperson]

The would have been a step up when her husband passed for his half interest in the property.  that assumes he owned it as well (you only stated he lived in it, but not that he also owned half of it.)

She is eligible for $250,000 exemption.  What was the original purchase price 46 years ago and what is the sales price?  maybe the value from 25 years ago is not going to matter.  

[Opus 17]

In order to claim the $500,000 exclusion for both the widow and her spouse, the sale must be completed within two years of the spouse‘s death. In this case, your mother will only qualify for a $250,000 exclusion.

However, as noted, she received a partial step up in basis when her spouse died, or a full step up in basis, if they live in a community property state. You can also reduce the capital gains by documenting as many adjustments to basis as you can, such as improvements made to the home over the years.

[Lennyb08]

Thanks for the reply.  The original price they paid for the home was $57,000.  Just before he died, he did a quick claim to his wife of the deed and the house was assessed at a value of $87,000.  I don't know if that transaction is considered a "new sale" for tax purposes.  The sale value she just got for the house was $405,000.00.

[NCperson]

@Lennyb08 unfortunately, the answer is easy.

SInce there was a quit claim deed prior to his death, there was no 'step up' at his death.  She assumes his cost basis. The assessed value at his death of $87,000 has no bearing because he did not own the home at his death. 

A) So the cost basis is $57,000 plus whatever improvements were made over the years.  If there were multiple improvements made to the same element of the home (say the roof was replaced multiple times), only the last improvment adds to the cost basis. 

B) The sales price is $405,000 less any closing costs (the sales commission is normally the biggest item)

So B) - A) or aroiund $350,000 is the capital gains and there is a $250,000 exclusion as long as she lived in and owned the home for at least of the last 5 years.  So there would be capital gains tax on around $100,000.  (probably smaller than that since there are probably home improvments and selling costs that would reduce that figure). 

[Opus 17]

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@Lennyb08 wrote:

Thanks for the reply.  The original price they paid for the home was $57,000.  Just before he died, he did a quick claim to his wife of the deed and the house was assessed at a value of $87,000.  I don't know if that transaction is considered a "new sale" for tax purposes.  The sale value she just got for the house was $405,000.00.

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First, you may want to consult an attorney, although it may not change much based on the dollar amounts.  On paper, by giving the home to his spouse, he bypasses the step-up in basis that she would get if she inherited it instead.  However, depending on the intention at the time, this might be an "implied life estate" which would still give her a stepped up basis.

However, this makes little difference, based on the dollar amounts involved.  If she inherited the house and does not live in a community property state, her basis would have half the price ($28,500) plus half the value when the spouse died ($43,500) totals $72,000.  If she inherited the house in a community property state, her basis would be $87,000.  If she was gifted the house, her basis is $57,000.  The difference between lowest possible basis and highest possible basis is $30,000 which would result in $4500 of capital gains tax--that's the most she could save by proving a higher basis by discounting the quitclaim deed, so it might not be worth consulting an attorney.

Also, check publication 523 beginning on page 8.  Certain closing costs at the time of the purchase and the time of sale can be used to adjust the basis and reduce the gain.  The cost basis can also be adjusted by the cost of improvements made to the home.

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