Ask the Expert: Is widow entitled to couple's exemption in home sale?
My parents purchased their house 48 years ago, paying $42,000. My father passed away in 2013. My mom just sold the house for $430,000. Since my father passed away, is she entitled to the $500,000 exemption on her profit?
No. She would have had to sell it within two years of his death to claim the $500,000 tax exemption that's available to married couples on the sale of their primary residence. But the fact that your parents bought the house before 1977 qualifies her for a break under an old tax law.
Under current law, a surviving spouse inherits half of a jointly-owned spousal house at its market value. Here's an example (to keep it simple, I've omitted sales expenses and capital improvements from the calculation):
John and Cathy pay $145,000 for their house in 1980. When he dies in 2013, it's worth $300,000. Cathy inherits John's half at its $150,000 then-market value. Five years later, she sells the house for $500,000. Her profit is the sale price minus her original cost. Her original cost is $222,500: $150,000 (the half she inherited from John) plus $72,500 (her half of the $145,000 1980 purchase price). The $500,000 sale price minus $222,500 is $277,500. As an individual, she has a $250,000 tax exemption. She owes taxes on $27,500.
But under the earlier law that applies to spousal property purchased before 1977, Cathy can inherit the whole house at its $300,000 market value at the time of John's death. Her profit is therefore $500,000 minus $300,000 equals $200,000. [Tax professionals, see two tax cases: Gallenstein M. Lee v. U.S. (1992), and Therese Hahn v. U.S. (1998)].
The bottom line
A surviving spouse qualifies for special tax treatment on the sale of inherited jointly-owned marital property that was purchased before 1977.
More information
nwsdy.li/CasemainGallensteinVSus
CORRECTION
An earlier version of this column misstated the amount Cathy would owe taxes on. The correct amount is $27,500.
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