Consider Irene, who recently became a widow when her husband, Henry, died. Like many married couples, they held the title to their home as Tenants by the Entirety. As a surviving Tenant by the Entirety, Irene automatically acquires all ownership and needs to update the Deed with an Estate Planning attorney.
Irene is uncertain what to do with her highly appreciated home. However, Irene should go slowly when it comes to major decisions such as home sales.
Irene wants to know the tax consequences of selling or staying. First, she needs to understand the tax breaks for individuals who sell their principal residences.
Exclusions. The law authorizes “exclusions” that allow home sellers to sidestep income taxes on most of their profits when they unload their principal residences. The profit exclusions are as much as $500,000 for couples filing joint returns and as much as $250,000 for single persons. Sellers are liable for taxes on gains greater than $500,000 or $250,000.
Irene decides to sell. Can she exclude $500,000 or $250,000? The answer depends on the sale date and whether she remarries. Though she’s no longer married, recently widowed Irene still qualifies for the higher amount — as long as she sells within two years of Henry’s death.
Irene remarries. If her new husband, Steve, then lives in the place as his principal residence for at least two years out of the five-year period that precedes the sale date, the profit exclusion will once again be $500,000 (with caveats).
Step-up in basis. Irene is also pleased to get some good news that the government authorizes exceptional condolence gifts for Irene, the basis of inherited assets “steps up” from their original basis.
On Henry’s death, a step-up in basis for their home benefits Irene when she sells her dwelling. What happens if she never sells?
On Irene’s death, there’s a step-up of her adjusted basis. When the heirs sell the home, they’re liable for capital gains taxes only on post-inheritance appreciation.
The bottom line for Irene and her heirs: Whereas a sale by Irene of a home that has appreciated immensely can trigger sizable federal and state taxes, a sale by the heirs dramatically shrinks or even erases those taxes. Irene—and others in similar positions—should work with an Estate Planning lawyer and a CPA to ensure they’re making the best decisions for their long-term plans.
Please call us at 301-696-0567 or self-schedule at lenaclarklegal.com if you would like help protecting your assets and loved ones in the event of death or disability.
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