New Capital Gains Tax Break Helps Surviving Spouses

Widows and widowers who don’t want to sell their house right away will get a tax break under a new law. The Mortgage Forgiveness Debt Relief Act of 2007 signed into law Dec. 20, 2007, gives surviving spouses two years to sell their house and receive the full $500,000 capital gains exclusion that married couples are entitled to.

Overview of Capital Gains Tax

Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. When you sell a capital asset, the difference between the amounts you sell it for and your “basis” (usually the amount you paid for it) is a capital gain or a capital loss. While you must report all capital gains, you may deduct capital losses only on investment property, not on personal property.

Gain on Sale of Home

Tax law (Internal Revenue Code §121) provides an exclusion from gross income for the sale of a principal residence, if the property was owned and used by the taxpayer as the taxpayer’s principal residence for at least two of the five years preceding the date of the sale. The amount of the gain excluded is $250,000 for a taxpayer filing individually. Couples who are married and file taxes jointly can sell their main residence and exclude up to $500,000 of the gain from the sale from their gross income. In the case of a deceased spouse, the period during which the deceased spouse owned and used the property is counted for the surviving spouse. A taxpayer who owns property during the five year period, but who resides in any facility, including a nursing home licensed by a state, counts the time residing in the nursing home as use of the property. See IRS Publication 523, Selling Your Home ( or your tax preparer for more information and other requirements.

Summary of the New Law

Under the previous law, if a spouse died, the surviving spouse could file jointly — and therefore get the full $500,000 exclusion — only for the year in which the spouse died. The new law allows surviving spouses to get the full $500,000 exclusion if they sell their house within two years of the date of the spouse’s death and the other ownership and use requirements have been met. The result is that now widows or widowers who sell within two years may not have to pay any capital gains tax on the sale of the home.

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.

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