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PhillipB EA
PhillipB EA, Accountant
Category: Capital Gains and Losses
Satisfied Customers: 704
Experience:  Enrolled Agent with 8 years experience in tax return preparation, representation, and taxpayer consultation
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We purchased our current home in 2004 thru a starker like

Customer Question

We purchased our current home in 2004 thru a starker like exchange (rental property to rental property). We moved into this house in 2012 as a primary residence. My husband and I filed taxes jointly and both of our names are ***** ***** mortgage. My husband
passed away in Oct 2014. My question is when I sell this house will I get the 500,000 dollars (married) capital gains exemption or will the exemption be reduced to 250,000 dollars (the single amount as my husband has passed away). I need to know this as it
was just brought to my attention that there might be a defined timeline that I can use the married exemption after the death of a spouse. Your assistance in this matter is greatly appreciated. We are residing in the State of Virginia - USA.
Submitted: 2 years ago.
Category: Capital Gains and Losses
Expert:  PhillipB EA replied 2 years ago.
Thanks for using! I will do my best to provide you with a clear and concise answer to your tax question based on the information that you have provided.
A colleague answered the issue of how long a surviving spouse can use the full 500,000 primary residence exclusion at this URL:
As she mentioned, there is a two year period after the spouse's death that you can sale your primary residence and take a full 500,000 exclusion. You have until 10/2016 to sale the home and qualify for the full 500,000 dollar exclusion.
There are some things that complicate the sale
First, there is an issue that needs to be considered in regards ***** ***** rental use of the home. There is a trap that will not allow any portion of the gain that can be attributed to depreciation after 1997 to be excluded from income. This means that the depreciation that was deducted as a rental expense each year (between 2004 to 2012) will be taxable gain. For example, if the basis was 200,000 dollars when you started to rent the home, we will (for simplicity sake) say you deducted 30,000 dollars in depreciation. If the home sales for 300,000 dollars in 2015, you will be be able to exclude 100,000 dollars of the total 130,000 dollar gain. (200k basis - 30k depreciation = 170k adjusted cost basis, 300k sales price - 170k adjusted cost basis = 130k gain, 130k gain - 30k total depreciation = 100k home sale exclusion) The depreciation will be taxable regardless of whether you qualify for a full 250,000 or 500,000 dollar exclusion. In this situation, you would pay tax on 30,000 dollars.
Second, the cost basis that you would use changed on the date of your spouses death. Depending on the state you lived in, the basis for his half of the property raised to the fair market on the day he died. This will help resolve some of the depreciation issue, in that the step up in basis eliminates his portion of attributable depreciation. Using the last example, assuming the fair market value on 10/14 was 280k, your basis on 10/14 would be 225k dollars (1/2 of 280,000 dollars + 1/2 of 170,000 dollars). 15,000 dollars of depreciation disappears with the 55k increase in adjusted basis (half of the depreciation was his). Your gain would be 75,000 dollars, the excludable gain would be 60,000 dollars (75k-15k your depreciation) and you would pay capital gain tax on 15k.
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