Cutting The Tax Bill When Selling a Widow’s Home

The loss of a spouse brings on a lot of decisions. A key question many widows consider is – should I sell the home or stay?

Some think about selling the home because they don’t need as much space. Some want to move closer to loved ones. Some want to get away from negative memories.

This decision is a bit of a balancing act. It’s usually a good idea to wait at least a year to make any major financial decisions. This gives you time to process the initial shock of your loss. But if you want to sell the home, you might save a bunch in taxes by selling it within two years of becoming a widow.

Taxes When Selling Your Home

First, the bad news: if you make a big profit (gain) from the sale of your primary residence, the IRS wants a cut. Depending on your current tax bracket, the tax rate could be as high as 20%!

Now, the good news: most (if not all) of the gain may be exempt from taxation. For single taxpayers, the first $250,000 of profit (remember – profit, not sale value!) is exempt from the capital gains taxes. For married taxpayers filing jointly, the first $500,000 of profit is exempt.

To qualify for the exemption a few rules apply, including:

• The home has to be your primary residence for at least 2 out of the 5 years before the sale;
• You’ve owned the home for at least two years; and
• You haven’t sold another home (and used the exemption) in the previous two years.

Tax Exemption When Selling a Widow’s Home

Here’s where a special provision for widows and widowers could lower your tax bill. It’s a bit complicated, so hang on!

In most cases, a widow files “Married Filing Jointly” in the year of their spouse’s death. A sale of the home would thus receive the $500,000 capital gains exemption.

After that first year, widows without dependents must file as single taxpayers. That would mean that the exemption would normally drop down to $250,000.

HOWEVER, the IRS will give widows the full $500,000 exemption if the home is sold within two years of their spouse’s death. This holds true even if the widow files as a single taxpayer in the second year.

After the second year, the exemption drops back down to $250,000. Also, to take advantage of this you can’t be remarried.

Don’t Let the Tax Tail Wag the Dog

While this is great news for some widows, I’d caution against rushing the decision to sell a home. In some cases, you aren’t facing any capital gains taxes anyway, such as:

• Your income (2019) is below $39,375, because your capital gains tax rate is 0%;
• Your profit will be less than $250,000 from the home sale; or
• You live in a community property state and the step-up in basis eliminates the taxable gain. (this could be its own post – consult a CPA for more details!)

The takeaway – work with a qualified CPA and financial planner if you’re considering the sale of your home after losing your spouse. I’ve covered this at a very high level, but there are many rules and exceptions to use this to your advantage!

For More Information

• IRS Publication 523 (2018), Selling Your Home
• Paying Taxes on a Home Sold After a Spouse’s Death