The rules for capital gains taxation related to real estate vary depending on rules established by the IRS to determine if the real estate property was a primary personal residence or investment property. When the home is a personal residence, capital gains tax breaks allow for a set dollar amount of capital gains to be excluded from taxation. The rules are generally the same for widows and widowers as they are for everyone else.
Capital gains tax breaks only exclude a portion of the gains for properties worth more than a certain dollar amount. As of 2012, a single person who meets eligibility requirements qualifies for a $250,000 capital gains exclusion, while a couple qualifies for an exclusion of up to $500,000. On a property sold that exceeds the exclusion amount, capital gains tax must be paid on the excess amount. Homeowners who sell for less than the maximum capital gains exclusion avoid paying capital gains taxes but are not entitled to a rebate or credit for the difference between the gain and the maximum. To qualify for the capital gains exclusion, the owner must have lived in the home at least two out of the past five years before selling.
Qualifying Rules for Widows and Widowers
The qualifying rules for a capital gains exclusion for widows and widowers differ slightly from the standard rules since one spouse is deceased and cannot meet the standard eligibility requirements. First, the widow or widower or the deceased spouse must have owned the sold property for at least two years prior to the spouse's death. The couple must also have lived in the house for at least two years prior to the death. Finally, the capital gains exclusion must not have been claimed by either spouse in the two years before the death.
If the deceased spouse lived in the home for two years or more while the surviving spouse lived in it for less than two years, the IRS considers the time spent in the home by the deceased spouse as time the widow or widower lived in the home. However, the surviving spouse must not remarry prior to selling the home to qualify.
Reporting Capital Gains
If you qualify for a capital gains exclusion that is equal to or surpasses the gain in the selling price of your home, the IRS does not require you to report the funds as income. If you must report the funds as income because the gains exceeded the $500,000 exclusion, fill out Schedule D of Form 1040, Capital Gains and Losses as well as Form 8949, Sales and Other Dispositions of Capital Assets with the information provided to you on Form 1099-S, Proceeds from Real Estate Transactions.
- Kiplinger: Home-Sale Profit Rules for Widows And Widowers
- IRS.gov: Publication 523 Main Content
- My Federal Retirement: Home Ownership and Income Taxes Part II: Sale of a Principal Residence
- IRS.gov: Publication 523 Selling Your Home
- IRS. "Publication 523 (2019), Selling Your Home." Accessed June 23, 2020.
- IRS. "Capital Gains, Losses, and Sale of Home." Accessed June 23, 2020.
- IRS. "Topic No. 701 Sale of Your Home." Accessed June 23, 2020.
- USDA Cooperative Extension. "What is the Capital Gains Exclusion for the Sale of a House?" Accessed June 23, 2020.
- IRS. "Topic No. 409 Capital Gains and Losses." Accessed June 23, 2020.
Ashley Mott has 12 years of small business management experience and a BSBA in accounting from Columbia. She is a full-time government and public safety reporter for Gannett.