Many married couples jointly own assets. When a surviving spouse sells them, how is he or she taxed on the sale?
The answer depends on when the joint ownership was created.
Since 1977, jointly owned marital assets are deemed to be owned 50 percent by each spouse.
Let’s say Fred and Ethel jointly own a house they bought in 1982 for $200,000. When Fred dies in 2015, it’s worth $1.5 million. When Ethel sells it, her taxable profit is the sale price minus the original cost. Her original cost on her 50 percent share is $100,000 — half the 1982 purchase price. But she inherited Fred’s half at its market value when he died — i.e., $750,000. Her total cost is $850,000 ($100,000 + $750,000). If she sells it for $1.5 million, her taxable profit is $650,000.
That profit is reduced by her tax exclusion on the sale of a primary residence. Married taxpayers filing jointly get a $500,000 tax exclusion on profit from selling a house they’ve owned and lived in for at least two years. Single tax filers get a $250,000 exclusion. Ethel is entitled to the $500,000 exclusion for two years after Fred’s death, provided she hasn’t remarried. If she has, she and her second spouse can claim a $500,000 exclusion on the profit from selling the house after he has lived there for at least two years.
An earlier law applies to marital joint property acquired before Jan. 1, 1977. That law presumes that the first spouse to die owned 100 percent of the house, unless the survivor refutes that presumption. As a result, its entire market value is included in the deceased spouse’s taxable estate — and the survivor inherits it all at that market value. Tell your tax adviser the legal cases that settled this issue are Gallenstein M. Lee v. U.S. (1992) and Therese Hahn v. U.S. (1998).
In the past, a survivor could trim estate taxes by refuting the presumption that the decedent owned 100 percent of joint assets acquired before 1977. But today, most estates aren’t taxable; so most survivors accept that presumption and inherit the assets at full market value.
THE BOTTOM LINE Tax treatment of jointly owned marital assets depends partly on when they were acquired.
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