My late husband purchased our house in 1973. He died in 2002. I recently sold the house for $620,000. Am I right that I inherited the entire house at its 2002 market value? For tax purposes, how can I determine what that was?
Get a retrospective appraisal by a certified real estate appraiser. You can find an appraiser online or through a real estate broker or attorney's referral.
You're right that you inherited the entire house at its market value. The reason: It was purchased before 1977.
A surviving spouse inherits only half of a house purchased after 1977 at its market value because he or she already owns the other half. Let's say John and Sally bought a house in 1980 for $200,000. When he dies in 2005, it's worth $700,000. Sally's cost basis in the house is $350,000 (half its market value) plus $100,000 (half the original price) -- i.e., $450,000. If she later sells it for $800,000, her profit is $350,000 ($800,000 minus $450,000). As a single taxpayer, Sally gets a $250,000 tax exclusion on her profit from the sale of her primary home. Her taxable profit: $100,000 ($350,000 minus $250,000).
But an earlier law applies to houses purchased before Jan. 1, 1977. That law presumes that the first spouse to die contributed the entire purchase price and therefore owned 100 percent of the house, says Michael W. Alderman, an East Meadow tax accountant. As a result of that presumption, the whole house is included in the estate of the first spouse to die. The surviving spouse therefore inherits it all at market value. If that's Sally's situation in this example, she has no taxable profit.
The bottom line The tax rules governing the sale of an inherited house sometimes depend on when the house was purchased.
TO ASK THE EXPERT Send questions to Ask the Expert/Act 2, Newsday Newsroom, 235 Pinelawn Rd., Melville, NY 11747-4226, or email email@example.com. Include your name, address and phone number. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own advisers for your specific needs.