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Capital Gains Exclusion for Surviving Spouses - 9/24/2025

Losing a spouse is a deeply emotional experience and the financial decisions that follow can feel overwhelming. One important area to understand during this time is how the IRS treats the sale of a primary residence after the death of a spouse. Under certain conditions, surviving spouses may qualify for a larger capital gains exclusion, up to $500,000, if the home is sold within a specific time frame.

Here's what you need to know.

1. The $500,000 Capital Gains Exclusion: The Two-Year Rule

In general, married couples who file jointly can exclude up to $500,000 of capital gains when selling their primary residence. For surviving spouses, this higher exclusion amount can still apply, but only if the home is sold within two years of the spouse's death.

This special provision offers some breathing room for surviving spouses, allowing them time to make thoughtful decisions without immediately losing the tax advantage.

To qualify, the following conditions must be met:

  • The home must be sold within two years after the spouse's death.
  • The surviving spouse must not have remarried before the sale.
  • The couple must have owned and lived in the home as their primary residence for at least two of the five years prior to the date of death.
  • Neither spouse can have excluded gain from the sale of another home within the two years before the current sale.

2. Step-Up in Basis: A Hidden Tax Benefit

In addition to the potential $500,000 exclusion, surviving spouses may also benefit from a step-up in basis. This means that the cost basis of the home, the amount used to determine capital gain, may be adjusted to reflect its fair market value on the date of the spouse's death.

This step-up can significantly reduce or even eliminate capital gains taxes on the sale of the home, especially if the property had appreciated substantially during the couple's ownership.

See an example below

3. Selling After Two Years: What Changes?

If the home is sold more than two years after the death of a spouse, the surviving individual is generally treated as a single filer and may only exclude up to $250,000 of capital gains—half the amount allowed under the two-year rule.

While the step-up in basis may still apply, the lower exclusion amount means that timing the sale could have a major impact on potential tax liability.

Important Reminders:

  • The exclusion only applies to a primary residence; not to vacation homes, rentals, or investment properties.
  • State tax laws may differ and should also be taken into consideration.
  • Because every situation is unique, it's wise to consult a qualified tax advisor or estate planning professional for personalized guidance.

For surviving spouses, the IRS offers valuable tax relief in the form of an extended capital gains exclusion and a possible step-up in basis. If you're navigating these decisions after the loss of a spouse, understanding the two-year window and how the rules apply can help you maximize your financial outcomes.

Thoughtful timing and expert advice can make all the difference.  For more information, contact your tax consultant.  Your REALTOR® can help establish a fair market value at time of death and answer any marketing questions you may have.

 

Here's a step-by-step example using your scenario to illustrate how the step-up in basis and the $500,000 exclusion work together for a surviving spouse:

 Scenario:

  • Original Purchase Price: $350,000
  • Capital Improvements Over Time: $100,000
  • Adjusted Basis Before Death: $450,000
  • Fair Market Value at Date of Death: $1,150,000
  • Home Sold by Surviving Spouse Within 2 Years: Yes
  • Sale Price (assumed equal to FMV): $1,150,000

Step-by-Step Calculation:

1. Determine the Stepped-Up Basis

In most states, if the property was owned jointly and both spouses were on title, half of the property receives a step-up in basis to the fair market value at the date of death. The other half retains its original basis. (Note: in community property states, 100% of the property may receive a step-up. This example assumes a non-community property state.)

  • One-half stepped-up to FMV: ½ × $1,150,000 = $575,000
  • One-half retains original basis: ½ × $450,000 = $225,000
  • Total Adjusted Basis After Death: $575,000 + $225,000 = $800,000

2. Calculate the Capital Gain on Sale

  • Sale Price: $1,150,000
  • Adjusted Basis (after step-up): $800,000
  • Capital Gain: $1,150,000 ... $800,000 = $350,000

3. Apply the Capital Gains Exclusion

Since the surviving spouse sold the home within two years, meets the ownership and use test, and has not remarried, they qualify for the $500,000 exclusion.

  • Capital Gain: $350,000
  • Exclusion: Up to $500,000
  • Taxable Gain: $0

Result: Because the $350,000 gain is fully offset by the $500,000 exclusion, no capital gains tax is owed on the sale of the home. By taking advantage of the stepped-up basis at the time of the spouse's death, and selling within the two-year window, the surviving spouse eliminated any taxable gain.

Kathleen Harken CRS, GRI, SFR, AHWD Keller Williams Realty DTC Englewood, CO (303) 909-5990 My introduction to the world of real estate came at an early age, working alongside my father in the industry. This early exposure instilled in me a deep appreciation for the intricate dynamics of the field. After brief detours into investment banking, mortgage lending, and marketing, I found my true calling in real estate in 1995. My diverse background equips me with a unique perspective that I use in crafting informed and strategic solutions for my clients. With each client I serve, my primary goal is to cultivate a tailored and educational experience. I understand that every individual approaches the real estate process with distinct aspirations and requirements. My dedication to client education stands as a cornerstone of my practice. I firmly believe that an informed client is an empowered one. I take the time to elucidate the intricate details of the buying and selling process, ensuring that my clients make decisions with confidence and clarity. This commitment to education extends to navigating the ever-evolving market landscape, equipping clients with insights that enable them to make confident choices. I've also been an active participant in the real estate community. Serving as Chairman of the Board at the local board of REALTORS in 2005-2006, a state director at the Colorado Association of REALTORS, and roles in the Colorado state CRS chapter, I continually seek ways to contribute and stay attuned to industry trends and best practices. While my professional commitment is unwavering, I also relish the Colorado outdoors and adventure that comes with it. Whether scaling Colorado's peaks or enjoying the camaraderie of a hockey game, or a bike ride/run on one of the many trails around the city, I find solace in the exhilaration of these pursuits. And, amidst all these ventures, my greatest adventure has been the 25+-year journey of marriage to my husband, Dale, and our shared commitment to fostering and raising large breed dogs. A unique fact about me is my non-skiing status ... a quirk that adds a touch of individuality to my Colorado roots. With a profound dedication to professionalism, client education, and a keen understanding of market trends, I offer a comprehensive experience that places the client at the forefront. Navigating the real estate landscape can be complex, but with my guidance and educational approach, my clients are empowered to make informed choices that align with their goals. Contact Me Visit my Website Send a Referral Subscribe to Newsletter