How to Sell a House After a Spouse Passes Away

With the loss of a spouse, amongst many things, the last thing you want to worry about is selling your home. Should you ultimately make the decision that you wish to sell your home we have included here some information you may find useful. As with anything, it is always recommended reaching out to a professional for specific questions you may have for help with this process. 

Let’s start with a hypothetical situation. Let’s assume that you recently lost your spouse and after everything you decide you want to sell your home. Let’s also assume that when you purchased your home, the property was worth about $100,000. There exists a provision within IRS tax code that allows home sellers that have profits from the sale of their primary residence up to $250,000 if they file as single or up to $500,000 if you file as married. Should you happen to sell the home, we’re using as an example, for $600,000; then, $500,000 in profit would not be taxed by the IRS if you’re married. 

To qualify, the home must have been your primary residence for no less than 2 of the last 5 years. According to the IRS Publication 523, “If you sell your home after your spouse dies (within two years after your spouse dies), and you have not remarried as of the sale date, you can count any time when your spouse owned the home as time you owned it, and any time when the home was your spouse’s residence as time when it was your residence.” What you can infer from this, if your spouse died more than two years ago, you cannot benefit from the tax exemption in question that would allow you to exclude the full $500,000. Should you decide to sell before the two years passes and would otherwise qualify for the exemption you should be able to apply the tax exemption as applicable. But remember, nothing is straightforward with the IRS. Just because you may not get the full $500,000 exclusion doesn’t mean you’re completely out of luck.

There are many rules when it relates to the IRS, but the primary concern in this example is whether or not you get to exclude $500,000 or $250,000 from your taxes. Using the same example of the home being owned by you and your spouse, when your spouse died you suddenly became the sole owner of the property. When you decide to sell the home, you will get to exclude $250,000 of profits from your taxes. But that’s not all, as with anything that deals with IRS or taxes. Using the same example still, the method of computing profit on your sale is to add up what it cost to purchase the home, what improvements you made while living in the home, and what costs you had in selling the home. The IRS has quite a lot of information to help you  compute what is and is not included in those numbers. 

With this same example, your spouse owned the home with you for a few years (at least) and when they died we could assume that their half of the home was “sold” to you for federal tax purposes. Here’s how that would, likely, proceed. Let’s assume that you and your spouse purchased the home at about $100,000 and when you sold the home, after your spouse passed, the home is valued at around $500,000. Assuming you sell the house for what it was worth, you would make about $400,000 in profit. However since your spouse owned half of the property and you inherit half of the property when they pass, you inherited their half at the current market value as of the day your spouse passed. Your spouse’s share of the house you inherited is at a value of $250,000 and you are selling that share for $250,000. What that means, is that you’d pay no taxes on the sale of their half when you sell and you wouldn’t pay any tax on your half since your half would be valued at under the $250,000 exclusion you’re allowed. Assuming these numbers were accurate, you wouldn’t have any federal income taxes due on the sale of the property. 

Depending on your unique scenario and the more accurate dollar amounts involved in your situation, you may want to consider the advice of a professional accountant. They can help you account for your own share of the house and your spouse’s share should you decide to sell. Contact Arbor View Properties today to learn more about how we can help you through this process.

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