When you sell your home, you can exclude $250,000 worth of profits from tax. Married couples filing joint returns get a $500,000 exclusion. The requirement that couples must file a joint return has posed a dilemma.
If one spouse dies during a given year, the widow or widower can file a joint return for that year. Subsequently, the survivor must remarry in order to file a joint return.
Suppose, for example, Chuck and Beth Peterson bought a house in the 1990s for $50,000. Chuck died in November 2005, when the house was worth $400,000. Beth would have had to sell the house by year-end 2005 to get the $500,000 exclusion. On a later sale, she could only claim a $250,000 exclusion.
A new federal law has changed the rules. For home sales after 2007, an unmarried surviving spouse can claim the $500,000 exclusion as long as the house is sold within two years of the spouse’s death. The new rule already has taken effect so homeowners who were widowed in late 2006 or 2007 can sell a house in 2008 (in 2009 for deaths in 2007) and use the larger exclusion.