Q. My husband died last year, and I am now considering selling our home and relocating to be closer to our daughter. I am concerned, however, about the potential tax consequences when I sell. Can you provide any information on this point?
A. Yes. The biggest concern when selling property is capital gains taxes. A capital gain is the difference between the “tax basis” in property and its selling price. The tax basis is usually the purchase price of property plus the cost of improvements. So, if you purchased a house for $250,000 years ago, added improvements at a cost of $100,000, your basis would then be $350,000. So, if you sold it for $750,000, you would then have $400,000 of gain [$750,000 – ($250,000 + $100,000) =$400,000.
The $250K Exclusion: However, you would then have the right to exclude a certain portion of that taxable gain using the home sale deduction provided in the Internal Revenue Code. Here is how that works: A single, unmarried person who has used the home as his/her principal residence for 2 out of the previous 5 years before sale can exclude up to $250,000 of that taxable gain. Couples, filing taxes jointly, can exclude up to $500,000 of that gain. But here’s the good news for persons in your situation: Surviving spouses can claim a full $500,000 exclusion if they sell their home within two years of the date of their 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 of the passing of their spouse, will have a $500,000 capital gain exclusion! By reason thereof, they may not have to pay any capital gains tax on the sale of their home (or at least far less than they would otherwise have to pay). So, consider a sale before the two years are up!
“Step-Up” in Basis: However, the surviving spouse does not automatically owe taxes on the rest of any gain. This is because of another tax rule called the “step up in basis”. Here’s how that works: When a property owner dies, the cost basis of the property is “stepped up” to its value at the time of his death. This means the current value at death of the property becomes the basis. When a joint owner dies, half of the value of the 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. The new cost basis of the property for the wife will be $250,000 ($100,000 for the wife’s original 50 percent interest and $150,000 for the other half passed to her at the husband’s death).
Double Step-Up for Community Property: In community property states such as California, where property acquired during marriage is often the community property of both spouses, the property’s entire basis may stepped up when one spouse dies. However, the survivor would have to legitimately claim that the home was owned as the couple’s “community property” in order to get the “double step-up”. If the couple held title to their home as their “community property” on their deed, the characterization would be clear. However, if they held it as “joint tenants” then the characterization would be less clear and the survivor might not be entitled to a double step-up in cost basis. This is why, where otherwise appropriate, I often urge couples to consider re-titling their home into their own names as their “community property”.
In California, there is a way to hold title that is similar to joint tenancy as regards survivorship. It is called “Community Property with Right of Survivorship”. I have written an article on topic which is available on our website
Property Tax: There is one more tax to consider, and that is the Property Tax. If you are over age 55, then under recently enacted Proposition 19, you can relocate to any other county within the State of California and take your current low property tax with you, subject to certain conditions. In this regard, the Alameda County assessor has a lot of information on its website to explain this further and guide you.
Good wishes on your relocation:)