To know the long-term capital gain tax, we need to calculate the long-term capital gain first. -- that is, the taxable portion of your sales proceeds.
All sales proceeds minus your basis on the house, minus your exemption exclusion of 250,000, is your total long-term capital gain. Then, this amount reported on your personal tax return will be taxed at your own long-term capital tax rate based on the remaining taxable amounts on your tax return.
For most of us in 2016 (and until further notice), the tax rate on long-term capital gains is 15%, while those in the top bracket pay 20% and those in the 10% or 15% tax brackets pay 0%.
Now, let's look at the calculation of the capital gain amount.
Surviving spouse. If you are a surviving spouse and you owned your home jointly, your basis in the home will change. The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date, i.e., 180 days after the date of death). The basis in your interest will remain the same. Your new basis in the home is the total of these two amounts.
If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home.
Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).
That is, if you purchase the house for 50,000, and by the date of your husband's death, or 180 days afterwards, the house has increase to value at 100,000. Then, you can use 50% of that value as your inherited basis. Therefore, your basis on the house instead of being 50,000 the purchase price, is now 75,000.
According to IRC 121, your gain on the house is qualified for 250,000 owner's exemption exclusion.
Most of our clients will enjoy an exclusion from some or all of the capital gains taxes that would otherwise be due on the sale of their residence. This exclusion is generally available if the property sold was your principal residence for at least two of the five years before the sale.
The maximum exclusion per owner is $250,000.
Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP