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Figuring widow’s home-sale exclusion

by on
in Small Business Tax

Q: My husband and I have lived in our home for 32 years. We bought it for about $80,000, and now it's worth more than $500,000. My husband died last year, and I'm planning to sell the home. I read about the $250,000 home-sale tax exclusion for single people and $500,000 for married people. Am I limited to $250,000? A.T., Rockaway, N.J.

A: Yes, but you probably won't owe any tax when you sell the home. Here's why: When your husband died, you inherited his share of the home. The tax basis of that share is stepped up to the fair market value as of the date of your husband's death. Let's say that the fair market value of the home was $500,000 on the date of his death and you each owned half of the home. Your basis of the half inherited from your husband is now $250,000. The basis of the half you have always owned is still $40,000 (half of the original $80,000 cost). So your total basis is now $290,000 ($250,000 plus $40,000). Bottom line: If you sell your home for $540,000 or less, you won't owe any tax on the sale, due to your $250,000 home-sale exclusion. ($540,000 – $290,000 basis – $250,000 exclusion = zero taxable gain).

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