Sale of a Residence After Death – Part I

Originally published in the Cedar Street Times

March 22, 2013

When a living individual sells a personal residence that results in a gain, many people are familiar with the rules which may allow an exclusion of the taxable gain of up to $250,000 ($500,000 if married filing joint) if the taxpayer lived in the property two out of the last five years as his or her primary residence.  In the depressed real estate markets over the past few years, many people have also learned (sometimes to much dismay) that a loss on a personal residence is not deductible.

But what happens when a house is sold after someone passes away?

The first thing we need to do is determine the cost basis.   At the date of death, the cost basis of the property changes to whatever the current fair market value (FMV) is (an appraisal is required – not a market analysis by a real estate agent).  If the house is held in joint tenancy or tenancy in common, only the decedent’s share of the home gets a step up (or down) in basis to the current FMV, and the basis for the survivor’s original share does not change.

If, however, it is held as community property, the entire interest in the house gets a step in basis to the current FMV.  If the property is held “with rights of survivorship” then the house passes immediately to the survivor which in turn inherits the new stepped up (or down) basis of the decedent to add to his or her own basis-in the case of joint tenancy or tenancy in common, or he or she takes the new FMV as the new basis if it was community property.

When the property is sold, the survivor reports the sales price less the new basis and selling expenses.  If it was sold soon after death, the survivor often realizes a loss due to sales expenses if they got a full step-up in basis (albeit nondeductible if maintained as a personal residence).  If the survivor realizes a gain, then, the survivor is eligible for the $250,000 exclusion assuming he or she meets all the normal rules.  If it was a spouse that passed away, then the widow or widower would have two years from the date of death to sell the house and still be eligible for the $500,000 exclusion.

In two weeks we will discuss the more interesting scenarios that play out when the property is not held “with rights of survivorship” and the property goes to the individual’s estate or trust, such as is often the case at the death of a single individual or the death of the second spouse.

Remember, it is always best to seek competent advice as everybody’s tax situation is unique and there are more rules that could affect you than just those mentioned in this article.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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2 comments so far

  1. Chris Schwanz on

    Travis, your blog is really timely. Your topic is exactly what my family has been going through with the sale of three properties in LA after my parents’ deaths. I always wondered why the calculation for capital gains on those properties was different than the recent calculation of capital gains on mine. You’ve explained it very well. Thanks greatly.


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