Losing a spouse can upend your entire life. The emotional fallout is intense, and for some, the financial consequences can be significant. Whether or not you and your partner planned carefully for the future, the financial implications of losing a spouse can feel overwhelming.
The questions related to selling the family home, moving to a new property, relocating to another area, and what it all means financially for surviving spouses require careful consideration and trusted resources. Let’s take a look at what capital gains are, when you have to pay them, and how you can be sure you are making the best financial move for your future.
What are capital gains?
A capital gain refers to the increase in an asset’s value compared to how much it cost at the original time of purchase. For example, if you bought into the Los Gatos housing market when your current home cost $300,000 and that same property is now valued at two million, you have essentially gained capital in the amount of $1,700,000. In other words, when you sell something for more than you originally paid for it, that profit is considered a capital gain. If your home was originally $300,000 when you first bought it, and the going rate for Los Gatos homes for sale is several times that amount, you stand to gain around $1.7 million dollars if you were to sell today.
Capital gains tax is, of course, the amount you are taxed on garnering that gain. Capital gains are not limited to personal residences. This term can be applied to any asset, including investment properties. It is important to note that capital gains must be realized in order to be taxed. If your home has appreciated in value, but you choose not to sell, you will not be taxed unless or until you sell the property.
How do you determine your capital gain?
Before determining the amount of your potentially taxable capital gains, you must identify your property’s basis. This refers to the original value of your home or what you paid for it. You will then need to determine your property’s current market value. Your real estate agent is a tremendous resource for this step, as they can compile a comparative market analysis report to see how your home stacks up against other properties on the market. For example, if comparable Santa Cruz real estate is now going for $1.5 million, that may be the approximate amount of your home’s current value. Once you have the data, you would subtract the basis from the current market value to find your capital gain.
There is another form of basis, however, that you should be aware of, which can significantly benefit your bottom line. The stepped-up basis refers to changes and improvements made to the property after one homeowner passes away. The stepped-up basis benefits you as the property heir because rather than the home’s basis being assessed at the original purchase price, it could be valued at the fair market price determined at the time of your spouse’s death. How is that helpful? Because the difference in those two numbers is likely much less than it would be between the original purchase price and current market value at the time of the sale. It could mean the difference between millions of dollars, especially for those in luxury homes, effectively eliminating the tax on your gain.
Are Surviving Spouses exempt from paying capital gains tax?
And now the question that could be worth a few hundred thousand dollars – are you exempt from paying capital gains? That depends. First, as mentioned above, you will want to speak with your real estate agent about the stepped-up basis to determine how much of a gain you might make on the sale of your home. a key aspect of financial planning for widows. Next, you will want to decide when you are interested in selling your property, considering the widow tax benefits.
While therapists generally recommend waiting to make any major life-changing decisions until at least six months, and up to one year, after the death of a spouse, capital gains parameters impose another timeline. Widows have up to two years to sell their homes under the joint exemption benefit. As a married couple, joint homeowners who file taxes together can exclude up to $500,000 of profit from their gross income. For a single home seller, that number falls to $250,000. A widow has up to two years to sell and still benefit from the $500,000 exclusion, which means you may be able to sell the home you owned with your spouse and avoid paying tax on the profit.
The bottom line
The best way to find success regarding capital gains, whether you have to pay or not, is to prepare as best you can, as early as possible. Speak to your real estate agent, tax accountant, and any trusted financial advisors early on in the process so you know what to expect and how much, if anything, you will need to pay come tax time. You will have at least a few months to prepare after the sale of the property because whichever year you sell, you will file taxes on the sale the following year. So, for example, if you sell in 2023, those gains will be filed in 2024 for your 2023 tax year.
Once you decide to sell your property and you begin working with your agent, determine your timeline and start asking questions right away. If you sell within the two years allotted to widows, you may avoid paying capital gains entirely. If you sell outside of this window, make sure you talk to your team ahead of time to make any necessary preparations for payment. You may want to set aside the money immediately in a separate account or have your financial manager make arrangements so you can easily access the necessary funds from investment accounts.
Scott Poncetta, a Silicon valley real estate agent, has a sterling reputation as a consummate professional. His savvy strategy for choosing list prices has garnered his clients well over the asking price repeatedly. His easygoing personality and sense of empathy take the stress out of the buying and selling process. Scott’s team at the Poncetta Real Estate Group is known for a compassionate approach and creative problem-solving. If you are interested in selling your Silicon Valley home, contact Scott today.
Related blog: Real Estate Strategic Planning for Widowers
