Key Takeaways
- A surviving spouse who hasn’t remarried can exclude up to $500,000 of gain on the sale of her main home within two years of her spouse’s death, and $250,000 after that.
- A hypothetical widow selling the $900,000 house she and her husband bought for $200,000 has a $350,000 gain, because the half she inherited takes its value on the day he died.
- If she sells inside two years, none of that gain is taxed. In the third year, $100,000 of it is.
- With sellers cutting prices this fall, a widow holding out for a better offer should know when her second year ends.
A hypothetical widow who hasn’t remarried still owns the house she and her late husband bought together for $200,000. Today it’s worth $900,000, a $700,000 rise from what they paid.
Two federal tax rules decide how much of that rise is taxed, and one of them runs out on the second anniversary of his death. If she sells before then, she owes no federal tax on the gain. If she sells in the third year, $100,000 of it is taxable.
This fall, that deadline is easy to miss. Sellers across the country are cutting prices. About 21% of listings in September had their initial asking price lowered, a four-year high, according to Realtor.com. The Associated Press reported that the average 30-year mortgage rate climbed as high as 7.4% in October. A widow waiting for a better offer can slip past the deadline without noticing.
Half the house starts over
The first rule sets her cost. When a spouse dies, half of what the couple owned jointly counts as his, according to the IRS’s Publication 551 (12/2025). She keeps the original cost of her own half. The half she inherits takes its fair market value on the day he died. This applies to property held jointly with right of survivorship, or as tenants by the entirety.
Couples in community-property states follow a different rule, and the math below doesn’t cover them.
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Two years at the couple’s limit
The second rule sets how much of the gain escapes tax. Any seller of a main home can exclude up to $250,000 of gain, or $500,000 on a joint return, after owning and living in it for at least two years out of the last five, the IRS says in Topic No. 701.
A surviving spouse keeps the couple’s figure for a while. Under Publication 523 (2025), she can exclude up to $500,000 if she meets two conditions:
- She sells within two years of her spouse’s death.
- She hasn’t remarried at the time of the sale.
The two-year ownership and use tests still apply. Neither spouse can have taken the exclusion on another home in the two years before. Once the window closes, she’s a single seller with a $250,000 limit.
Her basis has two parts:
- Her own half keeps its cost: $200,000 ÷ 2 = $100,000.
- His half takes its value at death: $900,000 ÷ 2 = $450,000.
That gives her a basis of $550,000. Selling at $900,000 leaves a gain of $350,000.
If she sells inside two years, the $500,000 exclusion covers the whole $350,000, with $150,000 to spare. Her taxable gain is $0.
If she sells in the third year, the limit drops to $250,000. That leaves $350,000 – $250,000 = $100,000 of taxable gain.
| Metric | Sells within 2 years | Sells in year three |
|---|---|---|
| Sale price | $900,000 | $900,000 |
| Basis | $550,000 | $550,000 |
| Gain | $350,000 | $350,000 |
| Exclusion | $500,000 | $250,000 |
| Taxable gain | $0 | $100,000 |
The step-up on his half matters as much as the deadline. Without it, her basis would be the $200,000 they paid, and her gain would be $700,000. Even the $500,000 limit would leave $200,000 taxable.
The anniversary matters more than the next price cut
For a widow who already plans to sell, the date she sells matters more than how much she gets.
Inside the window, she could sell for as much as $1,050,000 ($550,000 basis plus the $500,000 exclusion) before any of the gain is taxed. In the third year, that ceiling falls to $800,000 ($550,000 plus $250,000). Every dollar of a better offer above $800,000 becomes taxable gain.
A softer market changes some of this. If the house sells for less in year three, the gain shrinks with the price, and a sale at $800,000 or below would leave nothing taxed. But holding out for a higher number past the deadline means more of each extra dollar is taxed.
Three facts decide which column she lands in:
- The date of the sale, measured against the date of his death.
- Whether she has remarried by the time she sells. Remarrying before the sale takes the $500,000 limit away even inside two years.
- What the house was worth on the day he died. That figure is half her basis, so every step of the math rests on it.
Two years isn’t long after a death, and plenty of widows won’t be ready to move by then. That’s a perfectly good reason to stay put. It helps to know what staying costs if she plans to sell later anyway.
Same house, same $900,000 price, same $550,000 basis. Sold within two years of her husband’s death, none of the gain is taxed. Sold in the third year, $100,000 of it is.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
