Cost basis and exclusion on home sale for recent widow

[kamckinley]

Hi Everyone,

I have a question about the home exclusion for widows and how that is coordinated with the step up in basis.

I understand that the surviving wife gets a step up in basis for her deceased husband's half of the house.

I also just read that a surviving spouse can take the full $500,000 exclusion if the house is sold within two years of the death of the first spouse.

My question is can the surviving spouse get a step up in basis on the deceased husband's half AND qualify for the full $500,000 exclusion if sold within 2 years?

This seems like double dipping, but if it's true, it would eliminate the entire gain on the sale of a client's home.

Ex:

Sale price: $1,300,000
Cost basis: 995,000 (includes step up of deceased husband's cost basis)
Gain: 305,000

With the full $500,000 exclusion none of the gain would be taxable. However, if it's an either/or situation (i.e, she can only take the full exclusion or the step up in basis, not both), she will have some gain. Quick estimates show approx 55,000 gain if she only gets the 250,000 exclusion, or 110,000 gain if she gets full exclusion but can't take step up in basis at husband's death.

So... I guess my question is does a widow qualify for both the step up in basis and the full exclusion or is it either/or? If it's either/or, do you get to use the method that results in the lowest gain?

Thanks in advance for any help on this!

[TaxGuyBill]

Yes, she gets both. It doesn't really make sense to me, but §121(b)(4) allows the $500,000 exclusion, and that does not affect the Step Up in Basis.

[Maude Lebowski]

And if she's in a community property state and the home is community property, she gets a full step up. Talk about double-dipping.

[kamckinley]

Thank you, I was worried that she would be double dipping, so I'm grateful for the clarification!