Q:

Subject: Estate Tax

 

My mother is selling her home of 20 years and moving closer to us. My father died 10 years ago. Does she qualify for up $500k estate tax exemption or is she only qualified for the $250k? Her home is on the market for $400k.

 

Thanks

A:

This is the kind of thing your mother should be discussing with her personal professional tax advisor rather than relying on second hand advice from strangers on the internet.

What you are referring to is income tax not estate tax.

Assuming your mother is single, she would be entitled to a possible maximum exclusion of $250,000 of profit from the sale of her home.

Your father’s share of the profit was already wiped out when he passed away.  When a person dies, his heirs receive the property at its stepped up fair market value (FMV) as of the date of death (DOD), effectively cancelling out the accrued profit. 

In your mother’s case, she would have inherited half of the home from your father.  You didn’t say where she lives.  If she lives in one of the nine community property states, the cost basis for the full home was stepped up to its FMV at the DOD, and her gain will only be based on the appreciation since then.  If she lives in a non-community property state, the cost basis of her original half remains the same as before your father’s passing; but the cost basis of the half she inherited is stepped up. 

She really needs to work with a qualified tax professional to calculate her cost basis in the home, which will take into account the FMV as of your father’s death. as well as the cost of any improvements to the property she has paid for since then.  When her tax pro figures her adjusted cost basis and deducts that, plus selling costs, from the $400,000 sale price, I am betting that the net profit will be well below the $250,000 threshold, making all of it tax free for her.

I hope this helps.

Kerry Kerstetter