My in-laws bought their house almost 50 years ago for $18,000. It is now worth more than $1 million. My widowed mother-in-law is thinking of selling. What will her tax situation be?
Her tax situation depends on when she became a widow and what the fair market value of the home was at that time. Generally, if a widowed person sold the house within the same year she became widowed, she may exclude $500,000 of the gain on the sale of her personal residence. But if she sells the house in later years, she may exclude only $250,000 of gain.
As for calculating the gain, your mother-in-law may be entitled to a stepped-up basis, which can help her tax situation significantly. This is where the fair-market value of the home at the date of death comes into play. Your mother-in-law could be entitled to an additional stepped-up basis at least for her deceased husbandís half of the residence. For example, suppose he died in 2001, at which time the home had a fair market value of $750,000. Her basis would now be stepped up to $384,000 ($375,000 stepped-up basis for deceased spouseís share plus $9,000 for her half of the original purchase price).
Since the residence was purchased prior to 1977, there are some Tax Court rulings to consider. The Tax Court has ruled that a surviving spouse may claim a fair market value step-up for the entire basis if the deceased spouse paid for the property. But if the surviving spouse paid for the house, then no portion of the homeís basis would be stepped up.
Depending on your situation, you may want to follow the IRSís current position that pre-1977 property should be treated the same as post-1976 property. Regardless, your mother-in-law should discuss her tax situation with a tax adviser such as a CPA. He or she can help her find legitimate ways to minimize her taxes.
Jill H. Boag is a Huntington Beach, Calif., CPA. You can reach her at (714) 964-3770 or jillhb24@yahoo.com..
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