Personal Residence Exclusion after Death

Today TaxMama® hears from Tina in the TaxQuips Forum with this convoluted question. “A person has resided in the same one-family residence in for the last ten years without any children or wife. This person was bound into an estate contract to sell his residence for $800,000 in November, 2011 when his tax basis in the residence was $425,000. However, the person died in Dec 2011, leaving his CPA as an executor of his estate. The CPA doesn’t consummate the sale until Feb 2012. My question is, can the Homeowner’s exclusion be used to reduce income taxes owed to IRS?”

Dear Tina,

First of all, you’re talking about the personal residence exclusion, I am guessing. The homeowner’s exclusion is a reduction in property taxes from the property tax assessor.

Moving on to the sale. The residence was sold after the person died, right?

At the date of the death, the fair market value of the estate was $800,000, correct?
That can be proven because there was already a binding contract to buy the house for that amount.

So, when it was sold in February, it was sold for $800,000 and the tax basis was $800,000 because of the step-up in basis to the fair market value on the date of the death.

There is no gain or loss, except perhaps a loss from the selling costs and fees.

See, you don’t need to worry about the personal residence exclusion – or capital gains taxes.

And remember, you can find answers to all kinds of questions about sales after death and other tax issues, free. Where? Where else? At www.TaxMama.com.

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