DLA In The News

New Law Ends Rushed Home Sales To Shelter Gain When Spouse Dies

(c) 2008 Newsday. Reprinted by Permission

Shelter Gain When Spouse Dies   When a husband or wife dies, the financial implications are often overlooked, at least during the grieving process.  But for the surviving spouse who decides to sell the house, there are sometimes unexpected tax consequences depending on when it is sold.

 “The house is usually sold, but not right away,” says David J. DePinto, co-managing partner at DePinto Nornes & Associates, a Melville-based law firm specializing in estate administration and elder law.

Until this year, a surviving spouse who had jointly owned the house could shelter up to $500,000 in capital gains on a sale as long as he or she filed a joint tax return.  This meant the house had to be sold during the calendar year in which the other spouse died.  If the surviving spouse waited until the next year to sell the house, he or she could file only a single return, meaning that only $250,000 in capital gains could be sheltered from taxes.  For example, even if the husband died on Dec. 10, his widow had to find a buyer and close before Dec. 31 to get the full benefit.  “It was really an unfair provision,” DePinto says.  “I would have a spouse who sold the house even in the next calendar year… [having] to pay income taxes.”

A law passed by Congress in December has made it easier for a surviving spouse to take some time before selling the house and still get up to $500,000 in capital-gains protection.

Under the new law, a surviving spouse has up to two years from the date of the other spouse’s death to sell the house and still shield up to $500,000 in capital gains.  Filing a joint return is not necessary.

While the $250,000 shelter available under the old law may sound like a lot, DePinto says that many older surviving spouses were blowing past the threshold because of the way Long Island home prices had soared in recent decades.  He uses this example:

“You have two people who have been married for 60 years, living in a house that they bought in 1955 for $50,000,” he says.  “Even with nominal improvements, that house could be worth $800,000 today.”  Under the old law, if the husband died and his widow sold the house for $800,000 a year afterward, she would have had to pay taxes on as much as $125,000.  Under the new law, she would owe no capital-gain taxes.

The numbers are arrived at because of the “step-up” provision that allows a surviving spouse to exclude from capital gains half the fair market value of the house, plus half of the original purchase price.  (In this example, those figures would be $400,000+$25,000).  The capital-gains exclusion of either $250,000 or $500,000 can then be added to that number.  The step-up provision is not affected by the new law.

But as DePinto points out, be aware that you have two years from the time of death to sell the house and get the $500,000 exclusion, not two tax years.  After that, the exclusion will be only $250,000.

Tags: Cost Basis, Cost Basis Tax Reporting, Stepped Up Cost Basis