Ask an Advisor: When My Spouse Dies, Do I Get a Full Step-Up in Basis on My Home or Only the $250k Capital Gains Exemption?

What if a husband and wife own a home together that increases in value by $500,000. When one spouse dies and the other owns the property themselves, do they receive a step-up in basis? Or do they only receive a $250,000 capital gains exemption when they sell the property?

– Samuel

Your question deals with the rules surrounding both a step-up in basis of an inherited asset and the capital gain exclusion on the sale of a primary residence. These rules are independent of each other, so both are true: the surviving spouse receives a step-up in basis and they only receive a $250,000 exemption. That may sound a little confusing so let’s unpack it below.

If you have similar tax-planning questions or need help managing your investments, consider speaking with a financial advisor to see how they can help.

About the Step-Up in Basis

In finance, the term “basis” generally refers to the amount you pay for something. Basis matters because it’s the starting point from which you calculate taxable gains. For example, assume you buy something for $100,000 – that’s your basis. If the value of the asset grows to $150,000 and you decide to sell it, you’ll owe taxes on the $50,000 capital gain.

A step-up in basis occurs when the basis of an inherited asset is reset to its market value at the time the original (or co-owner’s) owner’s death. In other words, when a person inherits assets like stocks or real estate, the tax basis is adjusted to reflect the asset’s worth at the time of the owner’s passing, rather than the amount initially paid for it.

Returning to the example above, suppose you have an asset with a basis of $100,000, and by the time of your death, its value has increased to $150,000. Instead of inheriting your original basis, your heir receives a “stepped-up” basis. In this case, their new basis is $150,000, and they won’t realize a gain unless the property appreciates further.

(Accounting for the step-up in basis is an important component of tax planning and estate planning. A financial advisor with expertise in either area may be able to help you put this tax loophole to use.)

Capital Gains and the Sale of a Primary Residence

When one spouse dies and the surviving spouse decides what to do with their jointly owned home, it’s important to understand the rules for the stepped-up basis and capital gains tax exclusion. A surviving spouse will receive a step-up in basis that could adjust the inherited home to its fair market value at the time of their spouse’s death. If they were to sell it, they could still apply the Section 121 exclusion and avoid paying taxes on up to $250,000 in capital gains – and in some cases, $500,000 – on the home sale.

Tax Planning Tips

• If possible, consider delaying the sale of appreciated investments until you’re in a lower income tax bracket, like after retirement. Long-term capital gains are taxed more favorably, and if your income is low enough, you may qualify for a 0% capital gains tax rate. To see how much you may owe when you sell your assets, try our capital gains tax calculator.

• A financial advisor with tax planning and/or financial planning expertise can potentially help you determine the best time to sell assets to minimize the tax implications of the sale. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.

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