Photo by Valentina Locatelli on Unsplash

Question:

I’m 94 years of age and own a home in Massachusetts. When I pass, will my heirs be able to take the $250,000 federal deduction that I would have been entitled to if I have been living there for over four years? Does this differ from state to state?

Response:

You cannot pass on the $250,000 capital gains exclusion to your heirs, but they won’t need it. Capital gains are calculated as the difference between the proceeds on the sale of property and their tax basis. The tax basis starts as the purchase price of the property, but it can be adjusted in a few ways. One is that you can add in the cost of improvements to the property. For instances, if you purchased the property for $100,000 many decades ago and subsequently remodeled the kitchen at a cost of $50,000, the new basis would be $150,000. (Just make sure you keep records of these expenses in case the IRS decides to audit your return.)

However, what’s more important in your situation is that the basis gets adjusted upon the death of the owner to the property’s date-of-death value. So, if your home has a market value of $1 million upon your death (real estate in Massachusetts has become very expensive), that would become the new basis. This is often referred to as a “step-up” in basis or “stepped-up” basis. If your heirs then sold the property for $1 million there would be no capital gain and no tax due.

To clarify a couple more points, the $250,000 exclusion of capital gains realized on the sale of one’s home is available nationwide because it’s a federal exclusion. And there’s no four-year rule. Instead, the seller must have owned and lived in the property as their primary residence for two out of the five years preceding the sale.

For more information on capital gains, here’s a legal guide I prepared for my law firm: A Primer on the Tax on Capital Gains.

Related Articles

What Steps Can Solo Agers Take to Prevent Elder Abuse? Will Income from Special Needs Trust Affect Beneficiary’s SSI? If You Can Elect Portability, Why Do Marital Estate Tax Planning?