Taxpayer asks:

If the sole owner of a home passes – is there a capital gains write off or is it lost at death?  If not lost at death, is there a time limit?

Taxgirl says:

When an owner – sole or otherwise – of a home passes away, there’s a step-up in basis. What that means is that the fair market value of the home as of the date of death becomes the new basis (if there are multiple owners, the new basis is pro-rated). That’s true no matter what you paid for the house originally.

Here’s a quick example. Let’s say your mother bought her home for $100,000. And let’s also say that it was worth $250,000 at her death and you sold it a year later for $300,000. The capital gain on that sale is $50,000. That’s because the original purchase price ($100,000) is no longer applicable. The new basis is $250,000 – that date of death value. You calculate your capital gains based on the regular formula: selling price – basis = capital gains (or loss). In this case, that’s $300,000 – $250,000, for a capital gain of $50,000.

There’s no time limit on the sale for capital gains purposes. The basis doesn’t expire or fade away. However, the longer you hold onto the residence, the more likely it is to appreciate in value (thus increasing the capital gain). Remember this is a federal capital gains question: there may be applicable state and local probate and tax laws. 

Finally, there’s typically no write-off or loss for the sale of personal property: capital losses do not apply to a personal residence or other personal use property like your car. If you sold the home for $10,000, you can’t usually claim a loss on the difference between the basis and the selling price. Losses associated with property used in a trade or business and investment property, like stocks, may be deductible. However, that’s where an exception might apply for estate property: if you argue that the home is held by the estate for investment purposes, you may be able to treat it as a capital asset (and thus, realize a loss). This can be a tricky concept so it’s best to consult with a tax professional.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

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Author

Kelly Erb is a tax attorney, tax writer and podcaster.

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