Ask the Expert: Tax exemption for one or two?

When my wife passed away six years ago, she left me her share of our house. Therefore, when I sell it, I should be entitled to a capital-gains tax exemption on her portion as well as mine. But everyone tells me I can claim the tax exemption for only one person. Who's right?

All of you. Your friends are right that as a single taxpayer, you get a $250,000 tax exclusion on your profit from the sale of your primary home - not the $500,000 exclusion that's available to a married couple filing jointly. But you're right, too, in thinking that you get a tax break on your late wife's share of the house.

Let's assume the two of you originally bought the house for $50,000, and over time invested $100,000 in capital improvements. Let's say that six years ago, when your wife died, it was worth $460,000. That's when you got the tax break: You inherited her half at its $230,000 market value at the time of her death. If you sell the house now for, say, $520,000, your profit on her half is only $30,000: half the sale price ($260,000) minus its $230,000 market value when you inherited it.

To calculate your profit on your half, start with $260,000 (half the sale price). Then subtract $25,000 (half the original cost of the house) plus $50,000 (half the capital improve- ments). Your taxable profit on your half is $185,000 ($260,000 minus $75,000).

In this example, your total taxable profit is $215,000 - $185,000 on your half plus $30,000 on your late wife's half. Since your exclusion is worth $250,000, you don't owe any tax on the sale.

THE BOTTOM LINE Your tax exclusion on the sale of your primary residence is based on your current filing status.

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