Selling Your Home is Never Just a Transaction - Capital Gains and the Survivor Rule

Let’s talk about something not-so-fun, but super important:

Capital Gains Tax when you sell your home.

Listen, I get it. Taxes are about as exciting as a fiber cookie - not a treat, but good for you.

Still, if you're planning to sell your home, or even thinking about it in the next few years, this is something you should know. Often, this conversation only comes up when something big (and usually emotional) happens - retirement, divorce, the death of a spouse - and that’s what makes it even more important to get ahead of.

The Capital Gains Exemption on Your Primary Residence

Here’s the basic rule: when you sell your primary residence, you can exclude up to $250,000 of the gain if you’re single, or $500,000 if you’re married and filing jointly. That’s the IRS being generous - or at least reasonable.

To qualify, two things need to be true:

You’ve owned the home and lived in it as your primary residence for at least two of the past five years.
You track your basis - that’s your original purchase price, plus investments in the property (does not include regular maintenance).

Let’s Walk Through a Basic Example

You and your husband bought your home for $35,000 back in 1975. Back then, your neighborhood was quiet and modest. Now? The area’s booming, and your house is worth $500,000. You didn’t do major renovations - just the usual stuff like a new roof, paint, furnace, and carpet. So, for the most part, it’s the same house.

At first glance, you might say, "Holy hell, look at that growth! Owning a house really is a great investment." But slow your roll - that’s about a 5.5% compounded return per year, not even factoring the cost of taxes, insurance, repairs, or utilities. If you did, it'd be closer to 3%. Still good, but let’s not act like its magic money.

Alright, so you bought the house in 1975 and now it’s 2025, and you’re ready to sell and move to a beautiful condo on the Gulf Shores of Alabama.

Scenario 1: You're Happily Married, Both Alive

Easy math here:

Selling Price: $500,000
Purchase Price (Basis): $35,000
Exemption: $250,000 (you) + $250,000 (husband) = $500,000

Result: $500,000 - $35,000 - $500,000 = $0 taxable gain

You walk away clean. No capital gains tax. Nice.

Scenario 2: You’re Divorced

An unfortunate reality of life and marries is divorce. So, let’s say you got divorced when the house was worth $350,000, and you kept it by buying out your ex-husband's half - $175,000.

Your new basis (your cost) is:

$17,500 (your original half) + $175,000 (buyout) = $192,500

So now:

$500,000 (selling price) - $192,500 (adjusted basis) = $307,500 gain
Subtract your $250,000 exemption = $57,500 taxable

Capital gains tax at 20%, you could end up with a capital gains bill that's about $11,500.

Not devastating, but definitely worth knowing in advance.

Scenario 3: You’re Widowed

Now let’s talk about something harder - you’ve lost your spouse. There’s a special exception called the Survivor Rule you should know about.

If you sell the home within 2 years of your spouse passing away, you can still claim the full $500,000 exemption.

Within 2 Years:

$500,000 - $35,000 - $500,000 = $0 taxable

After 2 Years:

Now it’s trickier. Say your spouse’s half stepped up in value when they passed (common in community property states):

$17,500 (your half of original basis) + $175,000 (his stepped-up basis [$350,000/2]) = $192,500 adjusted basis

Now:

$500,000 - $192,500 - $250,000 = $57,500 taxable
Again at 20% capital gains tax, you might owe about $11,500.

That two-year window makes a real difference.

So... When Should You Sell?

That’s the million-dollar question, right?

Whether you’re thinking about moving for health reasons, downsizing, or dealing with a major life change, the timing matters. But more than that — your readiness matters. Are you emotionally ready to leave the home? Are you financially ready to handle the taxes and transition? Are you prepared for what comes next?

There’s no “right” answer in finance. There’s just what you’re comfortable living with. It’s all about the impact a decision will have on your life — financially, emotionally, and even spiritually sometimes.

So, if you're thinking about selling, let’s have a conversation. Not just about the numbers, but about you — where you’re at in life, and what you want from the next chapter.

Because your house might be just a house — but the decision to sell it is never just a transaction.

Jose Alvarez

Founding Advisor

Harvest Horizon Wealth Strategies

The information presented in this blog is the opinion of the author and does not reflect the views of any other person or entity unless specified. The author may hold positions in any securities discussed in this blog. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational, entertainment, and educational purposes and should not be construed as advice. Advisory services are offered through Harvest Horizon Wealth Strategies LLC, an investment adviser registered with the state of Wisconsin.