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I don't know whether to ask this here but it is a tax issue.

Having read ahead, I think this is the best place to ask this question.

The house we own has increased in value over $250K. We are a married couple. The first concern I have is if something happens to one of us, do we have any grace period to be able to exempt the $500K, instead of just $250K ?

You may not have to worry about that. When one spouse dies, the other is considered to have inherited 1/2 of the house. That means that half of the house will get a step up in basis to the FMV at the date of death. That can be a significant increase. To make it better, in some states (depending on commumity property laws) you get a step up for the full value of the house.

To answer your question directly, I think that if you sell the house before the end of the calendar year AND you file a joint return with the deceased spouse (IOW, you don't remarry and the executor of the estate agrees to file a joint return), you can still use the $500k exclusion. But I'd like to hear someone else confirm this - I haven't research the issue nor do I recall hearing it at any seminars.

The second issue is if we want to stay in this house and we pass the $500K mark on the gain in the value, are there any strategies for us, short of selling and rebuying the house ?

You could live in it until both of you die. Then all of your gain will escape income tax (but if you do that well you might be raising estate tax issues instead). Maybe consider yourself lucky to have bought such a good asset?

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