Home Sale Exclusion for a Surviving Spouse: the facts

1. Gain on the sale of a principal residence owned and used for two of the last five years is excluded up to $250,000, or $500,000 on a joint return (§ 121(a), (b)(1), (b)(2)). The amounts are statutory and have not changed since 1997.
2. A surviving spouse keeps the $500,000 for a sale within 2 years of the death, if the couple qualified for it just before the death and the survivor has not remarried (§ 121(b)(4)). One day past the window, the amount is $250,000.
3. The deceased spouse's ownership and use count as the survivor's (§ 121(d)(2)), so a home the couple lived in for years qualifies even if it was titled in one name.
4. The exclusion stacks on the step-up in basis. In Illinois a jointly held home steps up by half at the first death; the survivor's gain is measured from that new basis, and the exclusion applies to what remains.
5. Example: a home bought for $200,000, worth $900,000 at the death, sold for $1,200,000 eighteen months later. The new basis is $550,000, the gain $650,000, $500,000 excluded, $150,000 taxable; the same sale at 30 months would have $400,000 taxable.
6. A sale before the two-year use test is met, forced by work, health, or unforeseen circumstances, earns a prorated exclusion: the months of use over 24, times the full amount (§ 121(c)). A death in the family is among the unforeseen circumstances the regulations name.

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