Contributed by: BreeS, FreeTaxUSA Agent
Selling a home after the death of a co-owner can raise important tax questions. Is the gain taxable, and if so, how much? Generally, the gain from a sale is calculated by subtracting the cost basis from the sales price. This Community article discusses how basis gets a step-up for inherited stocks, property, and investments. Here, we’ll take a deeper dive into what happens when an individual sells a jointly owned home after the other owner has passed away and left their share as an inheritance.
Selling your main home
When you sell your main home, you may qualify for an exclusion on the gain from the sale based on three tests outlined in this Community article. As a surviving spouse, the IRS allows up to 2 years to sell the main home and receive the $500,000 exclusion available to joint filers. After that 2-year period, your exclusion is $250,000, provided you meet the eligibility requirements.
Basis calculation
If you sell a home after a joint owner has passed away and you inherit their share, you’ll want to consider the stepped-up basis to determine whether you have a taxable gain. Here’s why: when you inherit property, the IRS steps up the cost basis to the fair market value (FMV) on the date of the original owner’s death. Whether you are a surviving spouse or a non-spouse heir, you will benefit from a step-up in basis. For a co-owned home, usually only the deceased owner’s share of the basis gets stepped up. However, for a surviving spouse living in a community property state, the step-up basis is applied differently than it is in a common law (separate property) state. Here are the general guidelines:
- Non-spouse inheritance: The step-up in basis occurs on the date of death of the decedent. Only the deceased owner’s share of the basis gets stepped up.
- Community property state: In community property states (e.g., Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), both halves of community-owned assets typically receive a full step-up in basis upon the death of one spouse.
- Separate property state: In separate property states, only the deceased spouse's share of jointly held assets may get this basis adjustment.
- Valuation date: To take advantage of the step-up in basis, use the FMV on the date of death.
For a non-spouse inheritance, or for a spouse inheritance in a separate property state, follow these steps to calculate the new basis:
- Determine your half of the home’s original purchase price.
- Determine your half of the cost of any improvements made to the home.
- Determine the home’s FMV at the time of death. One-half of that amount will be your inherited stepped-up basis.
- Add the amounts from steps 1 through 3. This is your new basis in the home.
Example
Greg and Denise got married and bought a house in New Hampshire (a separate property state) in 1995 for $250,000. Denise passed away in 2022. It’s now 2026, so the $500,000 exclusion available to surviving spouses has expired. Greg can only exclude up to $250,000 of the gain from the sale. Greg determines that the home’s FMV at the time of Denise’s death was $550,000. Greg and Denise made $150,000 in home improvements, and Greg sold the house for $650,000 in 2026.
Greg calculates his new basis in the house as follows:
Original purchase price: $250,000/2 = $125,000
Improvements made: $150,000/2 = $75,000
$125,000 + $75,000 = $200,000 (Greg’s half of the basis)
FMV at the time of Denise’s death: $550,000/2 = $225,000 (Denise’s stepped-up half of the basis)
The new basis in the house for tax purposes at the time of sale: $200,000 (Greg’s basis) + $225,000 (Denise’s basis) = $425,000
$650,000 sales price - $425,000 basis = $225,000 gain from the sale
Because the gain is below $250,000, it’s fully excluded. If the gain had been greater than $250,000, only the amount over $250,000 would be taxable.
Entering the sale of a main home in FreeTaxUSA software
To enter the sale of a main home, follow menu path: Income > Uncommon Income > Sale of Main Home. We’ll use Greg’s example above to demonstrate.
When prompted to enter information about the sale, combine the surviving spouse’s original half of the basis ($125,000) and the stepped-up inherited half of the basis ($225,000) to arrive at the purchase price ($350,000). Only enter the surviving spouse’s half of the cost of home improvements ($75,000).
The Home Sale Summary page will show this:
If Greg had sold the house for $750,000, there would be a taxable gain, and it would look like this:
What if you sold a jointly owned second home/vacation home/rental home?
If the jointly owned home you sold wasn’t your main home, it will be entered elsewhere in the software.
- The sale of a second home/vacation home is entered by following menu path: Income > Common Income > Investments and Savings > +Add Investment.
- The sale of a rental home is entered by following menu path: Income > Business/Rental Income > Rental Income (Schedule E). + Add a rental. You’ll also want to add the rental property as a depreciable asset and indicate it was sold.
You won’t be prompted to account for home improvements separately when reporting the sale of a second home, vacation home, or rental home, so you’ll want to take those costs into account when calculating the cost basis to enter in the software. Follow the steps provided above to determine the new basis for a non-spouse inheritance, or for a spouse inheritance in a separate property state.
Summary
When a jointly owned home is sold after one of the owners has passed away, the deceased owner’s share may receive a step-up in basis equal to their portion of the home’s FMV at the time of death. This stepped-up amount is added to the surviving owner’s basis and can help reduce or eliminate capital gains tax on the sale.