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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.

Mary Anne Windes CCIM, CRB, CRS, GRI, RRS, e-PRO Real Estate Professionals of Destin, Inc. www.Destin-Real-Estate.com (850) 803-2211 BK583540 Mary Anne Windes, age 64, is a lifelong FWB/Destin resident. She grew up in Fort Walton Beach riding, training, and showing horses while she attended school. She earned an AA degree in Business Administration at Okaloosa-Walton Junior College and obtained her BA in Accounting from the University of West Florida with the help of a tennis scholarship. She has been married for 40 years to Capt. Kelly Windes. They have two grown children, ages 37 and 36, and four grandchildren. Mary Anne's early career in accounting started in auditing and setting up new businesses. She has put those strengths to work for her family setting up and managing 16 separate businesses including 10 various types of commercial boats, three real estate companies, a marina, and a few retail ventures, plus she's helped with several political campaigns. An active community leader, she was a two-time Chairman of the Mid-Bay Bridge Authority appointed for two terms by Governor Jeb Bush, President of the Emerald Coast Association of Realtors, Chairman of the Destin Area Chamber of Commerce, Honorary Commander of the 33rd Fighter Wing to receive the first F35 jets at Eglin AFB, Chairman of the Destin Fishing Rodeo, Chairman of the Miss Destin Pageant for 4 years, and Chairman, leader, or member of various other community boards, committees, and special projects. She has been a weekly usher at her church for over twenty years and co-teaches the Crown Financial Ministry series. Her primary vocation is real estate where she handles both commercial and residential transactions for friends and referrals. She is the broker and owner of Real Estate Professionals of Destin, an independent boutique real estate company located on the Destin Harbor for 30 years and Real Estate Professionals of NW FLA, Inc. She holds various distinguished designations in real estate that signify excellence, education, and experience. She was acknowledged for her achievements four times by receiving the coveted Realtor of the Year award conveyed by the Emerald Coast Association of Realtors for Destin in 1997, overall in 2010, for Destin in 2010, and for Commercial in 2022 as well as the Entrepreneur of the Year Award by the Women's Council of Realtors. She loves spending time with family and friends, a challenge, any type of furry pets, exercising, and Russell Stover's chocolate. Contact Me Visit my Website Send a Referral Subscribe to Newsletter