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How much tax will my mom owe on her home sale?

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Q. My mom is selling her primary residence in New Jersey after owning it for 60 years. She owned it jointly with my dad, who died in 1998. Does she use the 1998 estimated fair market value for half of the house, and the 1961 purchase cost for the other half, as cost basis — plus home improvements since 1998 — when she files her taxes? What happens with the $250,000 exemption?
— Helping

A. Your mom has some tax strategies to use when selling the home.

When the owner of a home dies, the tax basis of the property — the amount from which gain or loss is determined upon sale — is “stepped up” to the date of death value.

When a married couple owns a home jointly, half of the basis is stepped up to the value on the date the first spouse passes away, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

Note that in community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — the entire basis is stepped up, he said.

DeFelice offered an example of how this works in a non-community property state like New Jersey.

Assume your parents originally purchased the house for $100,000. Then say the house was worth $300,000 in 1998 when your father died. The original $100,000 tax basis would be stepped up to $200,000 — $50,000 (your mom’s share of the original $100,000) plus $150,000, which represents half of the home’s value at the time your dad died. Add to that any home improvements made since 1998 and you have your mom’s new tax basis.

“Single taxpayers will receive a $250,000 capital gains exclusion on the sale of a primary home, so your mom would only pay tax on gains more than $250,000 above her adjusted tax basis,” DeFelice said.

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This story was originally published on July 16, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.