SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.
My spouse will inherit her father’s house outright upon death and wants to sell it immediately. Would she be subjected to capital gains tax (above the $250,000 exclusion) on the sale and would it matter if only she is on the deed? Or would it make sense to have both of us on the deed to get the $500,000 exclusion for filing jointly?
– Kenneth
The short and simple answer is that you likely will not owe any capital gains tax when you sell the property that your wife is inheriting from her dad. However, it doesn’t really have anything to do with the capital gains exclusion you mention or whether you are both on the deed. A tax provision known as the “stepped-up basis” is what will help you potentially avoid capital gains tax.
I think this situation presents an interesting discussion. Let’s see what’s at play here. (And if you have similar questions or others related to financial planning and investing, consider connecting with a financial advisor.)
You are correct that the IRS lets individuals exclude up to $250,00 in profits from the sale of a primary residence from taxes. Married couples filing their taxes jointly can exclude up to $500,000. In other words, you can “make” that much money on the sale of your home without getting a tax bill.
For a simplified example, let’s say a couple buys a house for $500,000. They can sell it for up to $1 million without owing anything on that gain. If their capital gains exceed $500,000, they would owe taxes on the excess profit. This example is very simplified because it assumes the purchase price is the couple’s exact cost basis and ignores transaction costs like real estate agent fees that can reduce the gain.
However, this exemption doesn’t apply to all property sales. In order to qualify for the exemption:
-
The home must be the person or couple’s primary residence for at least 24 of the previous 60 months
-
They must have owned the home for at least two years.
Whether or not both people in the couple are on the deed is irrelevant. In fact, only one of them has to satisfy the requirements listed above. Your tax filing status determines whether the $250,000 or $500,000 exclusion applies. Again, single filers get the $250,000 exemption, while married couples filing jointly receive the $500,000 exclusion. (And if you need help with similar tax planning scenarios, consider speaking with a fiduciary financial advisor.)
If you sell the property immediately, you obviously won’t qualify for the capital gain exclusion described above. You’ll be fully on the hook for the tax liability on any gains you make when you sell the property.
