Sometimes, after the death of one spouse, it becomes inevitable that the surviving spouse sell the couple's residence for many reasons related to health, location to other family members, downsizing, maintenance on a large residence, etc. There are many factors to consider.
One factor to consider when selling the home of a surviving spouse is the potential capital gains on the home because it could save tens of thousands of dollars. Widow and widowers benefit from a new law giving surviving spouses time to make the decision whether or not to sell their principal residence after the death of the spouse. Selling the principal residence can be a significant emotional decision, so more time is helpful.
The Wall Street Journal described it in this article. Professor Beyer linked to the article and described it here.
For most couples in America, the most valuable asset is usually the family home. The home is usually highly appreciated, meaning they bought it many years ago at a low price and the home has significantly increased in value. And/or, they have paid off their mortgage.
In Arizona, particularly in Chandler, Gilbert, Mesa, and Tempe where I see that many couples that have owned homes for a long time, this could be significant. Even though many new homebuyers are feeling the effects of the downturn in the housing market, all the gains of the past decade have not been erased. Many modest homes are now worth in excess of $250,000. Accordingly, newly widowed spouses with home equity in excess of $250,000 should consider the change.
Beyond the tax consequences, the surviving spouse may have significant emotional attachments to the home. Accordingly, it may be difficult to think about the tax consequences of a sale after the death. The new law gives more time to decide so that the tax consequences can be given measured thought against the powerful emotions.
This is the background for the new law. Because Congress does not want to tax families on the sale of a home, they created a $250,000 exemption for singles and a $500,000 exemption for couples. However, when one spouse died, the surviving spouse had to sell the home quickly to qualify for the $500,000 exemption by reporting the sale on a joint tax return the year of the death.
Otherwise, if the spouse waited any longer, then the $250,000 exemption for singles applied.
Congress's new law now allows the survivor to claim $500,000 if the home is sold within two years of the death of the spouse and the survivor has not remarried.
This is a great benefit so that the surviving spouse does not have to make the decision to sell the couple's home during the time of grief immediately after the death of a spouse. So, after the death of your spouse or a loved one, it is important to consider the tax questions of what will happen to the surviving spouse.
When making long term plans for the residency of the surviving spouse, this tax should be taken into account. A decision to sell shortly after two years may make a large difference in the money left to care for yourself or a loved one.
