Surviving Spouse: Understanding Step-up in Basis and the Home Sale Exclusion
When a spouse passes away, the loss can be overwhelming, both emotionally and financially. As advisors, we’ve seen how unexpected transitions can leave families unsure of what steps to take next. While estate planning is critical, there are also important tax implications to understand when selling a primary residence after the death of a spouse.
It’s common for surviving spouses to feel isolated, even when surrounded by family. That sense of change can sometimes lead to the decision to sell the family home, not only to simplify life, but to create space for a new future. In these moments, understanding how the step-up in cost basis and the home sale exclusion work can make a meaningful difference.
Understanding the step-up in cost basis
When an individual passes away, assets titled in their name typically receive a step-up in cost basis to their fair market value (FMV) on the date of death. Put simply, the cost basis is what you originally paid for an asset, plus any capital improvements made over time.
Example:
Suppose a couple purchased their home for $200,000 and invested $50,000 in renovations, bringing the total cost basis to $250,000. Over the years, the home appreciates to $1 million.
If the home is jointly titled and one spouse passes away, the deceased spouse’s half receives a step-up to its fair market value ($500,000). The surviving spouse’s half retains the original cost basis.
| Surviving Spouse | Deceased Spouse | Total Cost Basis | |||
|---|---|---|---|---|---|
| Original Cost Basis | 100,000 | + | 100,000 | = | 200,000 |
| Plus: Renovations | 25,000 | + | 25,000 | = | 50,000 |
| Adjusted Cost Basis | 125,000 | + | 125,000 | = | 250,000 |
| ↓ | ↓ | ↓ | |||
| Step-up in Cost Basis | 125,000 | + | *500,000 | = | 625,000 |
*Assumes fair market value (FMV) of $1,000,000 on the date of death. Because the property is jointly titled, only the deceased spouse’s portion of the property receives a step-up in cost basis.
In this case, the new combined basis is $625,000. If the surviving spouse sells the home for $1 million, the taxable gain would be $375,000 before applying the Section 121 exclusion.1
Applying the Section 121 homeowner exclusion
You may already be familiar with this exclusion. Under Section 121 of the Internal Revenue Code, homeowners can exclude up to $250,000 of gain on the sale of a primary residence if filing singly or $500,000 if filing jointly.
To qualify, the homeowner must have owned and used the property as a principal residence for at least two of the five years preceding the sale.
For surviving spouses, the IRS allows continued use of the $500,000 exclusion, but only if specific conditions are met:
- The home is sold within two years of the spouse’s death.
- The surviving spouse has not remarried before the sale.
- Neither spouse claimed the exclusion on another property within the previous two years.
- The couple met the two-year ownership and residence requirements (the deceased spouse’s time counts).
This rule can create meaningful tax savings, particularly for those whose homes have significantly appreciated in value. Because the larger $500,000 exclusion is only available for up to two years after a spouse’s death, timing the sale of the property can make a substantial difference. Waiting too long could mean losing access to the joint exclusion and facing unnecessary capital gains taxes.
Moving forward after loss
Navigating the loss of a loved one does not have to be a solo journey. Our team of advisors will ensure that your family has a plan in place and the right expertise on their side when it matters most.
At Corient, we help surviving spouses navigate these transitions with clarity and compassion, coordinating with tax professionals and estate attorneys to ensure no opportunity is missed.
Sources:
https://www.irs.gov/taxtopics/tc701
https://www.irs.gov/publications/p523
1 Please note that certain states (AZ, CA, ID, LA, NV, NM, TX, WA, WI) allow a full step-up in cost basis for jointly titled community property
ABOUT THE AUTHOR
Patrick Shepherd
Patrick is an Associate Wealth Advisor in our St. Petersburg office. He joined Corient in 2022 through legacy firm Doyle Wealth Management. Before joining Corient, Patrick worked in public accounting preparing complex business and personal tax returns and auditing financial statements. In his current role, Patrick works with clients directly to develop comprehensive financial plans and wealth management solutions with an emphasis on strategic tax planning. Patrick received a bachelor’s and master’s in accounting from LSU and maintains an active CPA license. In his free time, Patrick is an active member in the community and enjoys playing guitar.
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4914673 – October 2025
