Capital Gains Taxes and the Surviving Spouse

By
Real Estate Agent with BRE # 01442690, Scott Keys Properties BRE# 01442690

Capital Gains Taxes and the Surviving Spouse

A friend of mine in West Portal (who always reads my newsletters!) asked me a question yesterday about Capital Gains Taxes and how that relates to her mother's home, her mother's deceased husband (passed away in 2008), and the 2 and 5 year period. Once I had it all together I decided it was definitely worth sharing:

 

Individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived in the home for a minimum of two of the last five years.

 

The 5 year period ends when the house is sold. In other words,  in the 5 years prior to the sale of the house, the surviving spouse needs to have lived in the house for at least 24 months in that 5-year period. And  the home must have been their principal residence. So the surviving spouse can take the $250K tax exemption. You cannot take the $250K exemption for the deceased husband (who passed away in 2008) - he does however have a huge impact on the current situation.

 

In determining the taxable amount for Capital Gains, you need to determine the "Cost Basis" of the home. Usually that is done as follows:

 

Purchase price

+ Purchase costs (title & escrow fees, real estate agent commissions, etc.)

+ Improvements (replacing the roof, new furnace, etc.)

+ Selling costs (title & escrow fees, real estate agent commissions, etc.)

- Accumulated depreciation (for example, if you ever took the office in the home deduction)

= Cost Basis


And then calculating your profit or loss would be:


Selling price - Cost Basis = Gain or Loss

 

However, for the surviving spouse in a Community Property State, the fair market value of the house at the time of the husband's death becomes the cost basis upon which the gain would be calculated.

 

To help you understand this a little better, I found the following from IRS Publication 523:

 

Surviving spouse.   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. The new basis for the half interest your spouse owned will be one-half of the fair market value on the date of death (or alternate valuation date). The basis in your half will remain one-half of the adjusted basis determined previously. Your new basis in the home is the total of these two amounts.

 

Example.

Your jointly owned home had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).

(However......)

Community property.   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. When either spouse dies, the total fair market value of the community property generally becomes the basis of the entire property, including the part belonging to the surviving spouse. For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return.

For more information about community property, see Publication 555, Community Property.

 

**The information provided above is freely available on the Internet and at IRS.gov. It may or may not apply to your specific situation. As is always the case in any situation, I recommend that you consult with a Trusted Tax Professional.**

 

Posted by

 

John M Scott, Broker / Owner, Scott Keys Properties, Certified Distressed Property Expert (CDPE), Council of Real Estate Brokerage Managers (CRB), serving San Francisco and the surrounding San Francisco Bay Area

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Re-Blogged 1 time:

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  1. Karen Burket 08/20/2011 07:30 PM
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Rainmaker
259,252
Steve Warrene
Keller Williams Realty - Cranberry Township, PA
The Warrene Team - Your Pittsburgh Professionals

Good information.  I never ran into that situation in my area but there's a first time for everything.  I saved it to a word file and put into my Real Estate Info desktop file.  Thanks.

Aug 13, 2011 06:46 PM #1
Rainmaker
248,440
John M. Scott
BRE # 01442690, Scott Keys Properties - San Francisco, CA
Broker / Owner San Francisco Bay Area

Hi Steve. I get questions like this all the time. After i did a little research on this one, I thought, why not. A perfect blog post.

Aug 13, 2011 07:02 PM #2
Ambassador
1,283,377
Kathleen Daniels
KD Realty - 408.972.1822 - San Jose, CA
San Jose Homes for Sale - Probate Specialist

John, Reading this takes me back to my probate and estate planning paralegal days.  Community property states are indeed a game changer for capital gains tax. There are so many exceptions and exclusions to many tax laws.  Great job on your research. I am sure it was very helpful to your friend in West Portal. 

Aug 14, 2011 11:06 PM #3
Rainmaker
248,440
John M. Scott
BRE # 01442690, Scott Keys Properties - San Francisco, CA
Broker / Owner San Francisco Bay Area

Kathleen, it was clear from her original question that she didn't understand this at all. When does the 5 years start? And can they claim the deduction for the deceased husband... We always assume people know so much...not always so.

Aug 14, 2011 11:13 PM #4
Rainer
201,577
Mary Macy
Top Agents Atlanta Metro - Roswell, GA
Top Agents Atlanta Metro

Even more reasons to put your property in a trust to avoid any taxes for the surviving spouse.  There are so many ways to avoid these double taxes on your families inheritance I am surprised that people let this happen.  Thanks for the post, I always suggest that people talk to estate planners as a part of their ownership decision on houses.

Aug 20, 2011 08:27 PM #5
Rainmaker
1,183,077
John Pusa
Sellstate Pacific Realty - Glendale, CA
Your All Time Realtor With Exceptional Service

John - Thank you for sharing detailed quality information and blog about capital gains taxes and the surviving spouse.

Aug 21, 2011 12:17 AM #6
Rainer
142,289
Karen Burket
Bank of Oregon a division of Willamette Valley Bank - Medford, OR
Valley Mortgage Grou, Conventional, FHA, VA, mortgages

This was great information, John.  Thanks for a great post that I felt compelled to re-blog!  Have a great day!

Karen 

Aug 22, 2011 01:40 PM #7
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John M. Scott

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