The Tax Consequences of Selling a House After the Death of a Spouse

POSTED ON: June 3, 2022

Many people want to sell their marital home after the death of a spouse and “downsize” to a smaller home, such as a condo or rental. This article discusses the tax implications of that move.

The Tax Consequences of Selling a House After the Death of a Spouse

If your spouse dies, you may have to decide whether or when to sell your house. There are some tax considerations that go into that decision.  This is addressed in the Kiplinger article, “Paying Taxes on a Home Sold After a Spouse’s Death“.

The biggest concern when selling property is capital gains taxes.  A capital gain is the difference between the “basis” in property and its selling price. The basis is usually the purchase price of property. So, if you purchased a house for $250,000 and sold it for $450,000 you would have $200,000 of gain ($450,000 – $250,000 = $200,000).

Couples who are married and file taxes jointly can sell their main residence and exclude up to $500,000 of the gain from the sale from their gross income. Single individuals can exclude only $250,000. Surviving spouses get the full $500,000 exclusion if they sell their house within two years of the date of the spouse’s death, and if other ownership and use requirements have been met. The result is that widows or widowers who sell within two years may not have to pay any capital gains tax on the sale of the home.

If it has been more than two years after the spouse’s death, the surviving spouse can exclude only $250,000 of capital gains. However, the surviving spouse does not automatically owe taxes on the rest of any gain.

When a property owner dies, the cost basis of the property is “stepped up.” This means the current value of the property becomes the basis. In general, when a joint owner dies, half of the value of he property is stepped up. For example, suppose a husband and wife buy property for $200,000, and then the husband dies when the property has a fair market value of $300,000.  In general, the husband’s one-half is stepped up to a basis of $150,000 (1/2 of $300,000).

In Louisiana, however, because Louisiana is a community property state (and assuming the home is community property and not seprate property), then both “halves” (both the husband’s one-half and the wife’s one-half) get stepped up to fair market value.  In other words, if the home is community property, and the home is sold shortly after your spouse’s death (so that little to no appreciation has taken plance), you will not even need to use the exclusion on the sale of the home (discussed above).  In other words, in community property states, where property acquired during marriage is the community property of both spouses, the property’s entire basis is stepped up when one spouse dies.

Keep in mind that this article only discusses tax implications.  There are other things to consider as well.  For instance, if the surviving spouse may have to go into a nursing home, the sale of the home (which would be an “exempt asset” for Medicaid), would be converted into a “non-exempt asset” (that is cash) after the sale.  So each case is different, and clients should not necessarily let the tax tail wag the estate planning dog.  Talk to an experienced estate planning attorney.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “The Tax Consequences of Selling a House After the Death of a Spouse” read also these additional articles: What to Do If You Want to Leave Your Children Unequal Inheritances and What are Your Early Signs of Dementia? and What Happens if I Take a Bigger RMD? and What are Benefits of Pre-Planning My Funeral?

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