In summary, last months’ article taught us that surviving spouses can exclude up to $500,000 of capital gains from the sale of their main residence if they sell within two years of their spouse’s death.  If it is over the 2 years since the death, the surviving spouse can exclude up to $250,000 of the capital gains for a single person, from a sale of the main residence.  

First let’s define some terms:  

CAPITAL GAINS - A capital gain is the difference between the “cost basis”  or “stepped up basis” of your property and its selling price.  

COST BASIS – What you paid for the property.  

STEPPED UP BASIS – Cost Basis if calculated as of the time of the death.

EXCLUSION – Exclusion of an amount from being taxed for this purpose.

The cost basis of property is “stepped up” under federal law when a property owner dies. In California that means the current value (at time of death) of the property becomes the new “cost basis.”  After last months’ article I got a message from “John” (fictitious name) who said he did sell 2 years and 2 months after his wife’s passing, but because he had the Value at the Time of Death documented, the $250,000 exclusion in his case was enough that he did not have to pay more in capital gains.  Had “John” been in one of those areas of California where value went up more quickly in 2 years, or had he wanted to live in the home another 5 years, he might have had capital gains on the value over the $250,000 exclusion.  Check IRS Publication 523, Sale of Personal Residence, as there are some exclusions to Capital Gains Tax ie. some costs of purchase/sale and some updates – consult the booklet or a CPA Tax Attorney for which updates qualify and Capital Gains calculations for your situation.

The VALUE Letter as we commonly call it is used to determine “Stepped Up Basis” by providing an appraisal of value at time of death.  (Often Realtors provide this service and/or appraisers.)  It provides a Market Analysis of similar homes sold around the time of death.  This is kept with the home to be used when you sell to show the NEW “cost basis” or “stepped up basis” of the property, for figuring out the potential capital gains.  You can see this simple step can potentially save thousands of dollars. 

First let me say, when a spouse passes the grief, trauma of death, and decisions are fired at you right and left.  This is the last thing you are thinking about, and in reality it’s months or years for some folks before the reality of “what happens next” comes to mind.

Maybe, just maybe this will trigger a memory of something to ponder when the time comes.