Inherited Home: Basis Reset and Capital Gains Exclusion for Surviving Spouses

Surviving spouses who inherit the family home get a favorable tax treatment: basis resets to current value, and if you sell within two years, you may exclude up to $500,000 in gains (versus $250,000 for single filers). Community property states offer even greater benefits.

Why it matters: Your home likely gets a favorable tax basis reset. The IRS treats the "purchase price" as whatever the home was worth when your spouse passed, not what you originally paid. If you eventually sell, this can eliminate a large chunk of taxable gain.

On top of that, surviving spouses who sell within two years of their spouse's death may be able to exclude up to $500,000 of gain (the married exclusion amount, rather than the $250,000 single exclusion). Combined with the basis reset, many people can sell their home with zero federal tax on the gain.

Whether you're selling or staying: Even if you plan to stay in the home, documenting the current value matters. It establishes the baseline for your heirs someday and for any future decisions. A proper appraisal (not a Zillow estimate) typically costs $300-$600 and is one of the most cost-effective things you can do.

Community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) get an even bigger benefit: both halves of the home's value can reset, not just your spouse's half.