No. of Recommendations: 9
His “half” steps up only upon death.

This is correct if they do not live in a community property state. If they live in a community property state, and the house is part of the 'community' then entire value is stepped up on his death.

Using simple numbers, the house started at $0 and is now worth $1,000,000. Upon his death she inherits his $500,000 “worth” of house at the stepped up value. So the “basis” is now her $500,000 which she can sell and claim a $250,000 exclusion. (She doesn’t get the full $500,000 exclusion because she is now just one owner, not the couple.) She will pay tax on the $250,000, or about $50,000 at 20% cap gains.

Sorry, that's not correct. As already stated, if they live in a community property state, the entire basis is stepped up to the value when one spouse dies.

If they don't live in a community property state, only 'his' half gets stepped up. However, if she sells within 2 years of when he died, she can still claim the entire $500k exemption. From IRS Pub 523 https://www.irs.gov/pub/irs-pdf/p523.pdf under the section for "Widowed taxpayers"

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;
2. You haven’t remarried at the time of the sale;
3. Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale; and
4. You meet the 2-year ownership and residence requirements (including your late spouse's times of ownership and residence if need be).


So, if she follows all the rules, then she will be able to exclude the entire $1MM value - $500k from the step up in basis, and then another $500k from the exemption.

If she sells now the cap gains is on the full $1,000,000, except there’s a $500,000 exclusion (because they are both alive), meaning she will pay on $500,000, or $100,000 at 20% cap gains.

Well, some of the capital gain is likely to be taxed at 15%, depending on what their other income and deductions are. If there are a lot of medical expenses, it's possible they have little/no other net income, in which case, some of the capital gains will also be taxed at 0%.

This may be completely wrong, and if so I’m sure someone will jump in and correct me.

Done.

AJ
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