Losing a spouse or loved one is never easy. However, many Utah seniors are placing themselves with a tax liability after the death of a spouse.
For many seniors, you have owned and lived in your home for many years – sometimes even decades. Your home is where you raised your family and made lasting memories. In addition, you have gained significant equity in your home for owning it for such a long period of time. So what happens when a spouse, who was on title to the house with you, passes away?
Understanding potential tax consequences is important when it comes to owning your home, and what you are liable for after a spouse passes. For single individuals there is a capital gains tax exclusion on the sale of your main home up to $250,000, and for married couples filing jointly that exclusion goes all the way up to $500,000.
For example, if you are single and originally purchased your home for $300,000 and then sold the home for $550,000 then you would be excluded from any capital gains tax. The equity you gained from the time you purchased your home until the time you sold it would be $250,000. Anything above that amount is then subject to capital gains tax.
However, if you are married and file your taxes jointly then that exclusion goes up to $500,000. If you had purchased your primary residence for $300,000 and then sold the home for $800,000 then you would be excluded from any capital gains tax. However, anything above that would then be subjected to capital gains tax.
But what happens when you have been married for years, filed jointly on your taxes, and a spouse dies? You then have up to two years from the date of death in which to sell your house and claim the $500,000 capital gains exclusion. If you decide to stay in your home for two years and 1 day then your capital gains exclusion will drop to $250,000 and the government will view you as a single filer.
By not making a move after the death of a spouse you can subject yourself to capital gains tax on money that would otherwise not be taxed. You’re allowing the government to lower the exclusion threshold and causing yourself an undue burden. It’s important to understand these scenarios so you can keep the most money in your bank account.
However, always consult your tax advisor or CPA for more information on your tax liability.
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