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My wife passed away 2 1/2 years ago (important: more than two years.)
I anticipate selling my home which I/we lived in for 26 years, in July.

I had an appraisal done shortly after she passed, because it is my understanding that "her" cost basis is 1/2 of that appraised value; regardless of the original purchase price and the cost of any improvements we made over the years. What I call "her" cost basis would be the half of the house that I inherited from her.

For "my" half, I take 1/2 the original purchase price plus 1/2 the cost of any IRS-approved improvements we made (finished basement, screened-in porch).

And then there is the sales price. I take that amount and subtract out any fees I pay to the buyer and seller agents, and also any IRS-approved work I have done in order to sell - painting, new carpet, etc.

Here's my question.

For tax/capital gain purposes, I've always thought of the two halves as separate. I calculate the profit (capital gain) on the half I inherited from my wife, and separately calculate the profit (capital gain) on "my" half. Then, since it's been more than two years since my wife passed, for her half I do not get to use the $250,000 exclusion. But I do get the $250,000 exclusion for "my" half.

So assume the profit on "her" half is $30,000, and the profit on "my" half is $200,000. Because I think of them as separate, I've thought of this as a $30,000 long-term capital gain. No gain on my half because the profit is less than the $250,000 exclusion.

But when I punch this information into TurboTax, it says $0 gain. It never asked about my wife's passing, so (I assume) it's just combining the two profits, coming up with $230,000, and applying my exclusion.

Is that the correct way to treat the gain? And thus my "two halves" thinking has been incorrect all along?

And finally, if this IS the correct way, then I don't really have to report anything at all, since there is no gain, right?

Thanks!
m
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Then, since it's been more than two years since my wife passed, for her half I do not get to use the $250,000 exclusion. But I do get the $250,000 exclusion for "my" half.

Total layperson here, but is that really the way it works? I would have expected that you simply have the stepped up basis on the half you inherited, and the fact you've lived there in 2 of the last 5 years gets you a $250k exclusion filing single on any gain from your combined/adjusted basis.

Hopefully one of the real experts will chime in. I'm curious to see...
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Is that the correct way to treat the gain?

Yes.

And thus my "two halves" thinking has been incorrect all along?

It's not completely wrong. It's only wrong in one minor way - with a major impact.

You did all of the thinking about the tax basis (the "cost") of each half correctly. (And explained quite nicely. Well done!) But when you get to the end, it is all yours. You get to use your $250k exclusion on the entire house, not just half of it.

I don't really have to report anything at all, since there is no gain, right?

To be honest, I get a bit lazy and report it anyway. Lazy, in that I have to do all of the work adding up all of the various costs and bits of information to determine if there is a taxable gain or not. Once I've done all that work, I'm putting on the tax return to justify my charge to the client for doing the work.

I believe the IRS has said if there is no taxable gain after the exclusion, then don't report it. But I have also heard of taxpayers getting letters from the IRS asking them to explain why they failed to report the sale of their home. If the sale price of the house - before deducting commissions and other costs - is less than $250k, then I'd be fine with not reporting. If necessary, you can show the IRS you qualify for the $250k exclusion and the entire proceeds are therefore not taxable. Other than that, what harm is there in reporting? You've done the work, and all you actually end up reporting is the sale price, cost basis, and exclusion. Plus purchase and sale dates.

--Peter
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I had an appraisal done shortly after she passed, because it is my understanding that "her" cost basis is 1/2 of that appraised value; regardless of the original purchase price and the cost of any improvements we made over the years. What I call "her" cost basis would be the half of the house that I inherited from her.

Depends on the state and how the title was held. It is possible that the entire property received the new basis. You need local tax advice to know.
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I believe the IRS has said if there is no taxable gain after the exclusion, then don't report it.

I sold a house in 2019 after my wife died. I used TurboTax for my 2019 taxes. TurboTax has a worksheet for the sale of a house and one for the cost basis. This information goes into a Form 8949 and from there into Schedule D. From there it goes to Form 1040.
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I had an appraisal done shortly after she passed, because it is my understanding that "her" cost basis is 1/2 of that appraised value; regardless of the original purchase price and the cost of any improvements we made over the years. What I call "her" cost basis would be the half of the house that I inherited from her.

For "my" half, I take 1/2 the original purchase price plus 1/2 the cost of any IRS-approved improvements we made (finished basement, screened-in porch).


That's correct if you don't live in a community property state. If you live in a community property state, the entire basis is stepped up to the value at her time of death. Then you would add any improvements you made since her death to that basis.

For tax/capital gain purposes, I've always thought of the two halves as separate. I calculate the profit (capital gain) on the half I inherited from my wife, and separately calculate the profit (capital gain) on "my" half. Then, since it's been more than two years since my wife passed, for her half I do not get to use the $250,000 exclusion. But I do get the $250,000 exclusion for "my" half.

That's not correct. What you are calling "her" basis became "your" basis when she died, so it's all "your" basis now.

So assume the profit on "her" half is $30,000, and the profit on "my" half is $200,000. Because I think of them as separate, I've thought of this as a $30,000 long-term capital gain. No gain on my half because the profit is less than the $250,000 exclusion.

Nope. You have a total gain of $230k on "your" basis, which is all excludable, since it's under $250k - assuming that you meet the other requirements of living in the property and owning it for 2 out of the past 5 years, and never having used it for business or rental, so that you have depreciation that needs to be recaptured.

Is that the correct way to treat the gain? And thus my "two halves" thinking has been incorrect all along?

Correct - it's not "two halves".

And finally, if this IS the correct way, then I don't really have to report anything at all, since there is no gain, right?

Unless there is a bidding war and your house sells for at least $20k more than you anticipate, that's correct.

AJ
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Thanks AJ, and others for your responses! A great help.
CheerSRX
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Should a widow or widower get their homes appraised shortly after their spouses passing to get an accurate cost basis for the inherited part?

What if you didn't get an appraisal?

nag
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That's what was recommended to me by my lawyer - ASAP get the appraisal, so you can do the proper calculation, down the road. No idea how one handles that if no appraisal was done. I suppose the local city/county keeps records of sales, if one can access those. I know here in Northern Virginia I can pull up complete sales records, online, for every home in the county. Whether the IRS would accept that information....
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Should a widow or widower get their homes appraised shortly after their spouses passing to get an accurate cost basis for the inherited part?

What if you didn't get an appraisal?

nag


It is possible to obtain a retroactive appraisal. Records are available. Probably not quite as accurate but doable and maybe more expensive.
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That's what was recommended to me by my lawyer - ASAP get the appraisal, so you can do the proper calculation, down the road. No idea how one handles that if no appraisal was done. I suppose the local city/county keeps records of sales, if one can access those. I know here in Northern Virginia I can pull up complete sales records, online, for every home in the county. Whether the IRS would accept that information....
---------------------------
....depends on to what extent you're looking at truly comparable properties.

And in some places IRS will consider property tax valuations, depending on how current the municipality keeps their valuations. In Wisconsin, the property tax bills are required to state not only the assessed value on which the tax is based but also the *estimated* fair market value, which is usually stated as derived as an estimated percentage for the city/village as a whole. With that info available, an IRS auditor will usually take it; especially if the first $250,000 or $500,000 of gain is going to be exempt anyway. In the case of property subject to probate, you can use that value for the probate proceedings, unless it's unusually far off. And in an estate, a sale soon after the death isn't get you much of a gain anyway. A loss is more likely, due to closing costs and other expenses related to the sale.

Bill
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It is possible to obtain a retroactive appraisal. Records are available. Probably not quite as accurate but doable and maybe more expensive.

My guess is that the further back in the past, the more the appraiser will charge. So, if you didn't get the appraisal done at the time of death, you can get it done now and tuck it into your files along with the deed and your records of capital improvements and whatever else you'll pull out when you sell.

It might not matter. My dad sold his last house for $90k over what he & Mom had bought it for, which is well under the $250k exclusion. (I did a linear interpolation to figure out a number to give his CPA, in case she needed one. It wasn't accurate, because housing price appreciation isn't linear, but it didn't have to be.)
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...a sale soon after the death isn't get you much of a gain anyway...

Yeah, I wouldn't bother with an appraisal in that case. But I think the question is what a widow should do if she keeps the house for years, but didn't get an appraisal done back when her husband died; and expects to sell for more than $250k over what they'd bought it for.

Answer: hire an appraiser who can do an appraisal for past dates. Either now, or down the road when she sells.

If she doesn't sell, it's moot, because her heirs will get a stepped-up basis. But it's not always possible to predict whether you'll be able to "go out feet first," as much as you might like to.
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The sale price can be used for evaluation when a sale is complete within 6 months of death.

We made the time limit on one estate (trust) but for the other probate court required an appraisal because it was almost a year. Fortunately, the appraiser saw the property after it was emptied and with new paint and flooring. The appraisal would have been much lower if he had seen it sooner.
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And in some places IRS will consider property tax valuations, depending on how current the municipality keeps their valuations.

When I had to go through probate (DYI with help from Probate Court) they had me get the property tax report from the town which does list an 'Appraised Value'. The report is dated approx a month after my husband's passing.

While it's a tad bit low, in my opinion, could I just use that?

Do I have this part right?

.5 of Appraised Value + .5 original purchase price + .5 cost of major improvements =
Adjusted cost basis

If so, there's no way I'd see (in my time) a gain of 250k over the house's adjusted cost basis, but at least I'd have paperwork to put in with the house deed so it's handy.
thanks in advance,
nag
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Also, does this mean that the IRS form 2119 from back in 1989 when we bought the house no longer applies?
It lists a new adjusted basis of our new home (when we bought it).

I've been hanging onto that doc, but if I now have a new cost basis...it might not matter?

nag
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Do I have this part right?

.5 of Appraised Value + .5 original purchase price + .5 cost of major improvements =
Adjusted cost basis


Close:

.5 of Appraised Value at the time of deceased spouse's death + .5 original purchase price + .5 cost of major improvements made before deceased spouse died + 1.0 of major improvements made since deceased spouse died =
Adjusted cost basis

with the caveat that 'major improvements' can be somewhat a term of art.

AJ
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Also, does this mean that the IRS form 2119 from back in 1989 when we bought the house no longer applies?
It lists a new adjusted basis of our new home (when we bought it).

I've been hanging onto that doc, but if I now have a new cost basis...it might not matter?


It does matter. For a home that you have a Form 2119 for, you need to use that as the original basis, rather than the original purchase price of the home.

AJ
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Not sure to start a new thread or not, but I'll try not to.
I'd like to put to bed the stepped up basis in my house due to my husbands passing.
Just get the paperwork together and put it aside for whenever I sell.

So
I purchased a home by myself.
I sold the home and filed form 2119, adjusted basis of new main home.

The new main home was purchased and put in both my and my husband (to be) names.
He passes away years later.

Since I have the basis of my single purchase of a home...then going to a joint ownership, I'm confused about how to manage the first basis.

I was not married and the cost basis on the first house I owned was 100k.

It was my single cost basis prior to joint ownership. It doesn't feel right that I should half that? It was my cost basis, not my deceased husband's. Can you tell I'm confused and just want to tuck this away with the deed in case I sell?

I'm thinking
My original adjusted basis 100k
.5 appraised value at date of passing xxxk
.5 improvement costs xxk
________________________________________________
new cost basis in house

Appreciate any thoughts...


nag
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Let us assume that you inherited in full the house after your husband's passing = since half the house was his. Joint ownership

Then, if I remember right, you only get taxed on $250,000 INCREASE (gain) in price as a single person ($500K for a couple).

Are you even over that threshold?

t.
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It was my single cost basis prior to joint ownership. It doesn't feel right that I should half that? It was my cost basis, not my deceased husband's. Can you tell I'm confused and just want to tuck this away with the deed in case I sell?

Under current laws (subject to change at the whim of Congress):

If your house was in a community property state, you would get a step up in basis to the full value of the house when your husband died.

If your house was not in a community property state, then you would get a step up in basis on half of the house, like this:

Basis for house at his death = original basis for house (in this case, $100k), plus all improvements to that point - let's say they are $50k = $150k basis in the house at the time of his death. Your half of this basis is $75k and his half was also $75k

Let's say the value of the house at the time of his death is $400k, so your half and his half were each $200k

Your new basis as of his death would be his $200k half of the home, plus your $75k half of the original basis = $275k in basis.

So, even though your half of the basis was only $75k when your husband died, you didn't 'lose' any of the original basis or the improvements that you and your husband put in while he was alive - they are part of the $200k step up in basis that you received when he died.

FYI - If you sell the house within 2 years of his death, you should still be entitled to exempt up to $500k in gains. If you wait for more than 2 years, you will only be able to exempt $250k in gains. However, with a basis of $275k, that means that net of selling costs and any other improvements you do to the house after his death, the house would have to sell for more than $525k for you have to pay capital gains taxes.

AJ
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It was my single cost basis prior to joint ownership. It doesn't feel right that I should half that? It was my cost basis, not my deceased husband's. Can you tell I'm confused and just want to tuck this away with the deed in case I sell?

I think your confusion can be set aside, as follows:

You are correct that when you purchased the house, the basis was all yours. When you added your husband to the deed, you made a tax-free spousal gift of half the value (and half the basis) to him. Therefore, you are entitled to a step-up in basis upon his death, according to the (non-)community property rules that govern your location.

Ira
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AJ and Ira,

Thank you so much for helping me understand this.

I really appreciate it.

nag
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