Sell of house
Hi, my husband passed away this year in California where we have our primary home. We lived in this house for 3 years out of the 10 years we owned it. I am switching my primary residence to our previous rental home in Florida, which we owned for 10 years but haven't been our primary residence for any of those years. I am going to sell the California house next year. If I also sell the Florida house in 2024 or 2025 (less than 2 years as primary residence, what would be the tax implications? I am also not planning on remarrying.
Best Answer
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Hello,
I am sorry to hear about your husband's passing. The IRS does allow for a partial gain exclusion on the sale of your primary home. This is often called the Section 121 exclusion. Generally, to qualify for the total exclusion, you will need to own and live in the house for at least 2 out of the 5 years leading up to the date of sale. Based on the information you stated, you may qualify for the $250,000 gain exclusion on your CA home. To qualify for the $500,000 exclusion (You plus your spouse), you will need to sell your home within 2 years of your spouse's death. You also can't be remarried at the time of the sale.
If you were to sell your FL house in 2024 as well, that home wouldn't qualify for the Section 121 exclusion. Besides the ownership and use test, the IRS also has a "Look-Back" rule stating you can't sell another home during the 2-year period. Because it is also a rental, you may have depreciation that you will need to recapture when you sell it.
If you wanted the $250,000 exclusion on your FL home, In most cases, you would need to live/owe it an additional 2 years after selling your CA home. On your tax return, you can find the depreciation taken while your home was a rental. This amount can be found on your Form 4562 and/or your Depreciation Schedule.
Answers
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Thank you so much for this information. That was really helpful.
Do you know for the sale of the California home, is there a "step up" in cost basis on the day of my husband's passing? If so, what documents do I need to show that?
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Yes, and since California is a community property state, you get an even better benefit. Instead of getting a stepped-up basis to the fair market value for half of the property, you get a full step-up to the fair market value for the entire property. (This is assuming your late spouse's half was included in his gross estate, whether or not any estate tax was due.) You should obtain an appraisal to ascertain the fair market value as soon as possible.
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You may elect to use the Step-up basis on the CA home. Form 8971 is used to report a step-up basis. Since that is not a form we support, I suggest you speak with a CPA or EA who deals with those scenarios to make sure it is reported correctly.
