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Tax Rules for Surviving Spouses on Primary Residences

July 25th, 2016

Posted in Asset Protection,Estate & Personal Planning,Real Estate Law

Understanding the tax rules as a widow or surviving spouse can help you project the real tax cost of selling your primary residence. Below are just a few general things to consider in making the tax analysis.

  • Primary Residence Exclusion: In order for the sale to qualify for the exclusion of $250,000 toward gain ($500,000 if married filing jointly), the following must be true:
    • You owned the home and used it as your primary residence for two of the past five years.
      • If you owned the home for any 24 of the past 60 months, you have met the ownership requirements. If either spouse meets this requirement, both spouses are considered to have met them. For widowed spouses, if the home sale occurs within two years of the date of death and the surviving spouse has not remarried, then the widowed spouse can count any time the deceased was an owner as time they were an owner.
      • Unlike the ownership requirements, normally each spouse must individually meet the residency requirement of the home being their primary residence for 24 of the past 60 months. However, for widowed spouses, if the home sale occurs within two years of the date of death and the widowed spouse has not remarried, they can count any time their deceased spouse was a resident as time they were the resident.
      • If all of the below requirements are met, the surviving spouse can still use the full $500,000 exclusion toward gain from the sale of their marital residence.
        1. Home sale qualifies for the exclusion,
        2. Home sale is within two years of the date of death,
        3. Widowed spouse has not remarried, and
        4. Widowed spouse meets the ownership and residency requirements:
          • You did not acquire the home through a like-kind exchange (also known as a 1031 exchange) during the past five years.
          • You did not claim any exclusion for the sale of another home that occurred during a two-year period.

 

  • Basis: When the timing as outlined above does not work or there is more than the principal residence exclusion in gain, a step-up in basis for the deceased spouse’s share of the home can be an important factor. The basis can also adjust for capital improvements or sale costs such as realtor commissions as an example.

 

  • Capital Gains Tax: The capital gains tax needs to be calculated to determine what tax would be owed. In a simplified sense, this is the sales price less the adjusted cost basis multiplied by the applicable capital gain tax rate.
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