Sale of Main Home - $500,000 Exemption

[Bob Brown]

If a spouse dies, it seems that in order to get the full
$500,000 exemption ($250,00 for each spouse), you have to
sell your house the year that one spouse dies. It seems liek
there must be more to this. Is there a way around it, to get
both exemptions but not sell the house the year one spouse
dies?

Can you sell the house to yourself?

 

[ed]

If a spouse dies, it seems that in order to get the full
$500,000 exemption ($250,00 for each spouse), you have to
sell your house the year that one spouse dies. It seems liek
there must be more to this. Is there a way around it, to get
both exemptions but not sell the house the year one spouse
dies?

Can you sell the house to yourself?

First: If you are in a Ccommunity Property State you get a
full step-up in basis upon the death of the first spouse.,
so if you sell immediately there is no gain If the market
went up by $500,000 in the year of her death you could get
that waived also for a sale of the house. If you wait until
next year you can only get a $250,000 market increase waived
on the sale.

NOW, if you are in a non-community property state and the
first spouse dies and you sell in the same year you can get
a $500,00 exemption on the profit on the 1/2 that didn't get
stepped up in basis, plus the market increase on the part
that did get stepped up. If you wait until next year to
sell you can only waive $250,000 of market increase on the
1/2 stepped up plus the amount of profit on your 1/2 that
didn't get stepped up.

All the above is of no consequence if you keep living in the
house and don't sell it, or even if you rent it out. The
rule only applies to the SALE of the house. Your basis
remains the same. IF you DO sell the house the above
applies. If you don't sell the house, whether you live in
it or rentit out, when you die your heirs get a FULL 100%
step-up in basis to your DOD value. Let them rworry about
the taxes on the market appreciation after your DOD.

If none of the above exempt you from any tax now or when you
sell, this year or later, you can afford the taxes.(;>)]]]]<

ed

 

[A.G. Kalman]

If a spouse dies, it seems that in order to get the full
$500,000 exemption ($250,00 for each spouse), you have to
sell your house the year that one spouse dies. It seems liek
there must be more to this. Is there a way around it, to get
both exemptions but not sell the house the year one spouse
dies?

Can you sell the house to yourself?

Your first assumption is correct. The $500K exclusion is
only available on a joint tax return. However, your cost
basis is going to change when the joint owner dies. The
decedent's half interest in the property will be stepped up
to fair market value as of the date of death. If you reside
in one of the community property states and the home is
community property (CP), then upon the death of one spouse,
the cost basis on the total property is stepped up to fair
market value. Effectively, this would wipe out (CP) any
capital gain if the home is sold shortly after death.

 

[San Diego CPA]

If a spouse dies, it seems that in order to get the full
$500,000 exemption ($250,00 for each spouse), you have to
sell your house the year that one spouse dies. It seems liek
there must be more to this. Is there a way around it, to get
both exemptions but not sell the house the year one spouse
dies?

Can you sell the house to yourself?

Are you considering the step-up in basis. Depending on how
it's titled, in a community property state, 100% of the
house gets the step-up so the gain goes to zero if the house
is sold relatively soon after the first spouse dies. If the
house is held for an extended period of time and the
surviving spouse sells as a "single" person, then the
exclusion is limited to 250 but keep in mind, the stepped up
basis of the house after death of the first spouse.

 

[Phil Marti]

If a spouse dies, it seems that in order to get the full
$500,000 exemption ($250,00 for each spouse), you have to
sell your house the year that one spouse dies. It seems liek
there must be more to this. Is there a way around it, to get
both exemptions but not sell the house the year one spouse
dies?

Don't forget the step-up in basis at the death of a
co-owner. In most cases this will wipe out some, if not
all, of the "paper" gain accrued before the spouse's death.

 

[Bill]

(e-mail address removed) (Bob=A0Brown) posted:

If a spouse dies, it seems that in order to get
the full $500,000 exemption ($250,00 for each
spouse), you have to sell your house the year
that one spouse dies. It seems liek there must
be more to this. Is there a way around it, to get
both exemptions but not sell the house the
year one spouse dies?
Can you sell the house to yourself?

You're referring to the amount of the "Married Filing
Jointly" exemption. There's also a Single exemption of
$250,000 -- and both are for the profit _above the cost
basis_.

What you are also overlooking, is that the spouse would
inherit the decedent's share at a "stepped-up" basis,
equivalent to the value on the date of death. So that
increased basis, plus the retained $250,000 exemption, would
still wipe out most gains from any taxation (or even a need
to report, under current law).

Here's an example: Couple buys home for $200,000. Live in
it for 20 years. One spouse dies, at a time when the home
is worth $600,000. Cost basis of decedent's interest
increases to $300,000 (1/2 value at death), and that is
added to original cost basis of survivor -- $100,000 (1/2 of
$200,000) -- for a total revised cost basis of $400,000. So
now survivor can sell home for $650,000 and still owe no
tax, because of "Single" exemption of $250,000.

Clear? I hope so.

Bill

 

[Paul Thomas, CPA]

If a spouse dies, it seems that in order to get the full
$500,000 exemption ($250,00 for each spouse), you have to
sell your house the year that one spouse dies. It seems liek
there must be more to this. Is there a way around it, to get
both exemptions but not sell the house the year one spouse
dies?

In the year of death of one of the homeowners, there would
be a step-up in basis for half the value for the surviving
spouse. While the remaining gain exclusion is $250,000 for
the surviving spouse, the step-up might be more than the
$250,000 exclusion that is lost.

And no, you can't sell the house to yourself.

 

[Stuart A. Bronstein]

If a spouse dies, it seems that in order to get the full
$500,000 exemption ($250,00 for each spouse), you have to
sell your house the year that one spouse dies. It seems liek
there must be more to this. Is there a way around it, to get
both exemptions but not sell the house the year one spouse
dies?

Generally not that I'm aware.

One thing you could do, if it's appropriate to your
situation, is to do a qualified disclaimer of the other
spouse's share of the house. It would go then to his kids
instead of you. If the kids live there for the next two
years as well, they'll also be entitled to an exemption

Can you sell the house to yourself?

Sure, why not?

Stu

 

[Harlan Lunsford]

(snipped...)

Sure, why not?

And how do you do that?

ChEAr$,
Harlan Lunsford, EA n LA

 

[Stuart A. Bronstein]

And how do you do that?

Which part? First comes finding a buyer. Put an ad in the
paper, put a sign on the lawn, put it on eBay.

Next is negotiating a contract. That's the hardest part.
Go to the nearest stationery store and you might find one.

Finally you either need to find a lawyer or title company to
draft the deed and complete the transaction.

Stu

 

[Bob]

Bob Brown wrote:

Your first assumption is correct. The $500K exclusion is
only available on a joint tax return. However, your cost
basis is going to change when the joint owner dies. The
decedent's half interest in the property will be stepped up
to fair market value as of the date of death. If you reside
in one of the community property states and the home is
community property (CP), then upon the death of one spouse,
the cost basis on the total property is stepped up to fair
market value. Effectively, this would wipe out (CP) any
capital gain if the home is sold shortly after death.

What if the joint tenants in a CP state (in this case
California) are registered Domestic Partners? The state has
tried to equalize things for Domestic Partners, but does the
Federal Government go along with this. The $500,000
exclusion works when both partners are alive and sell, but
what happens when one partner dies as far as federal taxes
are concerned? The same as a married couple?

 

[Herb Smith]

What if the joint tenants in a CP state (in this case
California) are registered Domestic Partners? The state has
tried to equalize things for Domestic Partners, but does the
Federal Government go along with this.

No, the federal government (i.e. Congress) does NOT
recognize Domestic Partners as being the same as married
spouses. You must file as SINGLE (or possible HOH if there
are dependent children involved). Filing as MARRIED
(separate or joint) is not available to you on the federal
level.

The $500,000 exclusion works when both partners are alive and sell, but
what happens when one partner dies as far as federal taxes
are concerned? The same as a married couple?

Not quite correct. IF each partner meets the ownership and
occupancy requirements (2 of the 5 years prior to sale),
THEN each gets to claim up to $250,000 exclusion on their
portion of the gain. If there is only one owner, then the
exclusion is only $250,000 in total.

If one co-owner dies, the cost basis of his/her portion of
the house is "stepped up" to the proportionate market value
on the date of death. The cost basis of the surviving
partner is not affected for federal purposes. This adjusted
basis becomes the asset value for the estate return (if
required) of the decedent. If the house is sold in the same
year, there would be no tax liability on the decedent's
income tax return, due to the increased basis and potential
$250,000 exclusion. The surviving co-owner would have a
$250,000 exclusion, but retains his/her original adjusted
basis.

If the house is not sold, or is sold in a following year,
the tax consequences to the surviving co-owner are similar.
The BENEFICIARY of the estate would receive his/her portion
of the house with the stepped up cost basis, and may have a
gain on the sale.

 

[Stuart A. Bronstein]

What if the joint tenants in a CP state (in this case
California) are registered Domestic Partners? The state has
tried to equalize things for Domestic Partners, but does the
Federal Government go along with this. The $500,000
exclusion works when both partners are alive and sell, but
what happens when one partner dies as far as federal taxes
are concerned? The same as a married couple?

The federal government would have to recognize domestic
partner community property laws for the purposes of
determining income - each partner technically earned half of
what both together earned. My understanding is that's the
reason we have joint returns for married couples now - due
to Congress's reaction to the effect of community property
with respect to income tax.

But for a rule based solely in federal law, they don't have
to permit the same effect to married couples as to
registered domestic partners.

But can someone take the exemption on the final (or estate)
income tax return of a single person who has died? If so
the result should be about the same.

Stu

 

[A.G. Kalman]

What if the joint tenants in a CP state (in this case
California) are registered Domestic Partners? The state has
tried to equalize things for Domestic Partners, but does the
Federal Government go along with this. The $500,000
exclusion works when both partners are alive and sell, but
what happens when one partner dies as far as federal taxes
are concerned? The same as a married couple?

As DPs can not file federal joint returns, the $500,000
exclusion does not exist.

 

[Phil Marti]

The federal government would have to recognize domestic
partner community property laws for the purposes of
determining income

That would be my initial reaction, but then there's DOMA,
which says, anyway, that for Federal purposes a marriage is
one man and one woman. All the IRS references to community
property I've seen use the term "spouse," as does the one
Code section I easily stumbled on. So I wonder.

AFAIK there hasn't been any litigation about the interplay
of state property laws, which are generally given deference
in the Code, and DOMA. Seems to me there's a lot TBD.

 

[Stuart A. Bronstein]

That would be my initial reaction, but then there's DOMA,
which says, anyway, that for Federal purposes a marriage is
one man and one woman. All the IRS references to community
property I've seen use the term "spouse," as does the one
Code section I easily stumbled on. So I wonder.

It has nothing to do with marriage or community property per
se. Under state law some people form partnerships which
require that each partner is immediately the owner of half
of all income earned by the other partner.

AFAIK there hasn't been any litigation about the interplay
of state property laws, which are generally given deference
in the Code, and DOMA. Seems to me there's a lot TBD.

My understanding is that the reason we have joint returns
now is because community property laws said each spouse
owned half of all income earned by the other spouse, so that
each should be taxed on half of the total earnings of the
two.

That's the same situation we have now with the community
property of California domestic partnerships, except that
the statute expressly excepts income taxes from the
recognition of community property.

There has been a recent change in that law, but I haven't
read it thoroughly yet, so I don't know how that will affect
this issue.

Stu

 

[Bob]

As DPs can not file federal joint returns, the $500,000

exclusion does not exist.

I (OP) realize that, but we can each file individual returns
for $250,000 each, which amounts to the same thing from a
tax perspective. My question (perhaps not stated clearly
enough) involves what happens when one of us dies. We have
lived in the same house for nearly 25 yrs and have seen a
lot of appreciation (much more than $500,000). In the past,
when one partner has died, the survivor has often had to
sell the house to pay estate taxes. For a married couple, as
I understand it, in a CP state, the tax is postponed until
the survivor subsequently dies. Does the IRS follow
California laws (i.e., domestic partners can own community
property, and presumably not be subject to tax on that
property when the first partner dies)? Have the changes
to the domestic partner rights in California addressed this
problem?

 

[Phil Marti]

My question (perhaps not stated clearly
enough) involves what happens when one of us dies. We have
lived in the same house for nearly 25 yrs and have seen a
lot of appreciation (much more than $500,000). In the past,
when one partner has died, the survivor has often had to
sell the house to pay estate taxes. For a married couple, as
I understand it, in a CP state, the tax is postponed until
the survivor subsequently dies.

Thanks for the clarification. You understand the effect,
but not the reason, which has nothing to do with state
property law.

Under Federal estate tax law, if all assets go to the spouse
there is no estate tax liability. This is true in all
states. Because of DOMA, domestic partners (or same-sex
spouses in MA) do not get this marital exemption.

The other issue is what the surviving domestic partner in a
community property state would wind up with as basis in
community assets. This determines how much capital gain the
survivor would have upon sale of the property.

Let's consider a legally married man and woman. The husband
dies. In non-community property states the wife's basis
becomes 1/2 of the basis as of his date of death plus 1/2 of
the fair market value as of his date of death. This is the
same outcome in those states for any joint owners of
property. In a community property state her basis becomes
fair market value as of his date of death.

Now introduce DOMA. It has no effect on this question in MA
because MA isn't a community property state. In a state
which has domestic partnerships and community property, it's
unclear to me which position the IRS will take.

 

[A.G. Kalman]

As DPs can not file federal joint returns, the $500,000

I (OP) realize that, but we can each file individual returns
for $250,000 each, which amounts to the same thing from a
tax perspective. My question (perhaps not stated clearly
enough) involves what happens when one of us dies. We have
lived in the same house for nearly 25 yrs and have seen a
lot of appreciation (much more than $500,000). In the past,
when one partner has died, the survivor has often had to
sell the house to pay estate taxes. For a married couple, as
I understand it, in a CP state, the tax is postponed until
the survivor subsequently dies. Does the IRS follow
California laws (i.e., domestic partners can own community
property, and presumably not be subject to tax on that
property when the first partner dies)? Have the changes
to the domestic partner rights in California addressed this
problem?

Re your comment on deferral of taxes for a surviving spouse
in a CP state: When a spouse dies in a CP state and the home
was community property, the cost basis of the home is
stepped up to fair market value as of the date of death.
This effectively wipes out all the capital gain had the
house been sold before death. There is no deferral of taxes
as there is no tax liability to defer.

In a non CP state, only the decedent's half interest in the
home is stepped up to FMV on the date of death.

As a DP owning the home jointly, you would be treated no
differently then the surviving spouse in a non CP state.
Your cost basis in the home is the sum of your cost basis in
your half interest just prior to the death of the joint
owner plus 1/2 of the FMV on the date of death.
Effectively, your partner's potential capital gain gets
wiped out upon his death. If you sell the home you can
shelter $250,000 of gain.