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 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?
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?
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 you exempt from paying capital gains tax?
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
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 real estate agent for the Silicon Valley area, 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.