Here's one from Bob Bruss with insight about tax considerations of a surviving widow or widower after her/his spouse passes.
Internal Revenue Code 121 says a surviving spouse has until the end of the year of the other spouse's death to sell the principal residence and claim up to $500,000 tax-free profits. The tax reason is the year of a spouse's death is the last year a surviving spouse can file a joint-income tax return with the deceased spouse.
However, IRC 121 doesn't mention the stepped-up basis benefit for a surviving spouse who inherits the deceased spouse's half of the principal residence.
Suppose you and your wife are both on the title to your home. You die. You and your wife owned your home in joint tenancy with right of survivorship, in your joint living trust, or in your will you leave your half of the house to your surviving widow.
The result is your widow will receive a new stepped-up basis to market value for the half of the residence inherited from you. In a community-property state, the entire value of the house will be stepped-up to market value on the date of your death.
As you can see, after one spouse dies, there is no reason the surviving spouse should rush to sell the home. It's true the IRC 121 tax exemption declines from $500,000 to $250,000 after the year of the co-owner spouse's death. But that disadvantage is far outweighed by the stepped-up basis for the surviving spouse. Please ask your tax adviser for full details.
