Sale of principal residence-elder issues
QMy husband passed away two years ago and I want to sell my house to move closer to my children. We purchased our home 20 years ago and I am concerned that I will have to pay a large capital gains tax if I sell. We paid $250,000 for the house and probably made about $50,000 of improvements over the years. The house is now worth about $1.1 million. Can you estimate how much tax I will have to pay if I sell?
Again on the sale of a principal residence is calculated by subtracting your tax basis plus selling costs from your selling price. The tax basis is generally calculated by combining your purchase cost with qualifying improvements. However, the basis of any property acquired from a decedent is its fair market value on the date of the decedent's death
(or on the alternate valuation date). Principally, this “stepped-up” basis rule applies to property acquired by bequest, devise or inheritance. It also applies to property required to be included in the decedent's estate for federal estate tax purposes. Property acquired by the decedent's estate, as well as property acquired directly from the decedent without passing through the estate, qualifies for a “stepped-up” basis.
Since, in community property states such as California, each spouse has an undivided half interest in community property, an heir acquires the decedent's half interest from the deceased spouse and is entitled to a stepped-up basis under the foregoing rule. The surviving spouse is also entitled to a stepped-up basis for his or her half interest if at least half of the community property in question is includible in the decedent's gross estate for estate tax purposes.
If your home was a community property asset at the date of your husband's death, then you will qualify for the stepped-up basis rule. Your tax basis will be the date of death fair market value and not the much lower purchase price of $250,000 plus the $50,000 in improvements.
If you still have a gain after applying your new stepped-up basis, you may still qualify for the $250,000 capital gain exclusion afforded for the sale of a principal residence.
Gain exclusion specifics
For sales of principal residences, gains up to $500,000 are completely tax-free for married couples who file joint tax returns. The limit is $250,000 for single and married filing separate status.
To qualify for the exclusion, the home must have been owned and used as your principal residence for at least two years out of the five-year period ending on the sale date. However, the exclusion doesn't apply to the extent of any depreciation claimed after May 6, 1997 (for example, if you depreciated an office in the home or rented the house for a period of time). For homes acquired in transactions where gain from selling a previous home was rolled over to the current residence, ownership and use of the prior residence are counted for purposes of meeting the two-out-of-five-years test.
If your home qualifies for a 100% step-up in basis to the fair market value at the date of your husband's death and you qualify for the $250,000 gain exclusion, the value of your home would have had to increase by over $250,000 since his death before you would have any taxable consequences on a sale.
Barry Dolowich is a certified public accountant and owner of a full-service accounting and tax practice with offices in Monterey. He can be reached at 831372-7200. Please address any questions to Barry at PO Box 710 Monterey, CA 93942-0710 or email: bdolowich@gmail.com.