July 10th, 2017 by Emmy Hernandez
Dear Emmy, I’m selling my home almost two years after my husband’s passing. May I still take the full $500,000 capital gain exclusion allowed for jointly owned properties?
By Emmy Rodriguez
No, you cannot – but work-arounds abound. Generally, individual federal taxpayers are allowed a maximum $250,000 deduction from the profit made off the sale of a primary residence. A married pair, filing jointly, may double that exclusion to $500,000. A surviving spouse may file a joint return for the year of their partner’s passing. But after that, the widowed person files as ‘single,’ where the cap remains at $250,000.
The IRS does offer another mechanism that could lower your tax bill; if you became the sole owner of the home after your husband passed, which is often the case, you may claim a ‘step-up’ for your ‘inherited’ value of his half of the home. This step-up amends half the home’s fair-market value – reassessed on the date of your husband’s death. This can sometimes reduce your capital gains even more dramatically than claiming the joint exclusion.
Here’s an example: Suppose a couple initially purchased their home for $100,000. The value of the house is appraised, usually after-the-fact, at $800,000 on the date of death. Two years later, it’s sold for $900,000.
The capital gain for each half of the property is calculated separately. For the surviving spouse’s original portion, the purchase price is halved to $50,000 and the sale price is halved to $450,000. Her profit is $400,000. After the single-filing exclusion, the taxable gain is $150,000.
For the inherited half, the ‘purchase’ price is $400,000 – half the assessment at death – and the sale price is $450,000. The profit is $50,000. In this scenario, the combined taxable gain is $200,000. That’s $100,000 less than what would be taxable if both spouses were living.
There are additional adjustments allowed that could lower your taxable profit even further. The selling price for the home can subtract the real estate agent’s commission and other closing costs. Also, the costs of any permanent, and permitted, home improvements may be added to the purchase price.
If you’ve used the house as a rental property or previously claimed a home office deduction, then you were entitled to claim depreciation. After the sale, that depreciation is separately ‘recaptured’ (a fancy word for taxed). This may raise your tax burden a bit. Clearly, this can get complicated.
Pre-planning offers other, far simpler, strategies. Because California is a community property state, changing the title of a jointly owned house avoids this cumbersome can of worms. If the home is titled as “community property with right of survivorship,” then when one spouse passes, the survivor will automatically become the ‘new’ sole owner of the home. Essentially, the widower acquires the property and the entire ‘purchase price’ is set at the fair market value on the date of death.
Now for the least complicated strategy: place the house inside of a living trust.
Whether you’ve planned ahead or not, there are several ways to reduce your capital gains tax when selling your home, just not in the manner you’ve suggested. Do seek a financial advisor to best address your specific situation.
In conclusion, I wish to thank the people who send in their questions. Inquiries like this one can apply to many people. Although everyone’s situation differs, this column can alert readers to potential considerations and solutions that, if overlooked, may significantly affect their financial lives. If you have a question, please submit it to email@example.com or call our office at (626) 943-8833.