A wrote:

- quote -

Yes, but with the basis step up (either 50% or 100%
depending on state law), the "need" for the exemption also
disappears in the short run.

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A <A[at]aol.net> wrote:

- quote -

What state? How is the title to the house held?

It's possible that upon his death, she inherits his half
with a step-up in basis.

Seth

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A <A[at]aol.net> wrote:

- quote -

A,

With the problem that you're addressing you may be missing a
huge issue. It's called "stepped up basis" upon the death
of one spouse. If they live in a community property state
and the property is held as community property, the new
basis for the WHOLE property becomes the FMV at time of
death. If not and otherwise, if held as JTWRS, half steps
up to FMV upon the death of one co-owner spouse.

BC

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A <A[at]aol.net> wrote:

- quote -

Yes, she does, but in exchange she gets a 50% stepup in
"cost basis" in the asset. If they live in a Community
Property state, the the basis probably gets "stepped up"
100%, or to the FMV on the date of his death.

- quote -

Basically the same result in either case. See the above
explanation of basis step up.

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A wrote:

- quote -

She can file a joint return for the year of death.
Therefore, the $500K exclusion would be available on that
return. In addition, the cost basis of the house would
change because of the death. See answer below as to how this
works.

- quote -

She can't file a joint return in 2005 and therefore she
would only be entitled to a $250K exclusion. BUT: her cost
basis in the home has changed. Assuming they live in a
separate property state, his half ownership interest would
be stepped up to fair market value (FMV) of the home as of
the date of death. This would mitigate part if not all of
any gain as the original cost is not used. If a community
property state: both spouse's interests are stepped up to
FMV as of date of death. So, unless the home appreciated
dramatically from the date of death to the sales date, there
would not be any gain that exceeded $250K.

--
Alan
http://taxtopics.net

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My mother's house has appreciated about $600K since they
bought it in 1972. My mother is 85. Her spouse is quite ill
and could die in 12-18 months.

If they sold the house now - they'd get the $500K cap gains
break. They file jointly. What would happen if he dies
while they still owned the house. Does she lose his $250K ?

What if he died in Feb 2005 and she sold the house in Nov
2005 - same tax year.

What if he died in Nov 2004 and she sells the house in June
2005 - different tax years.

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