Does a Widow Have to Pay Capital Gains Tax? Step-Up and Exclusion

In most cases, a widow does not have to pay capital gains tax on assets inherited from a spouse if she sells them at or near their value on the date of death. Federal law resets the tax basis of inherited property to its fair market value on that date, erasing the built-up gain that accumulated during the marriage. A home sale can layer on an additional exclusion of up to $500,000. The main exceptions are traditional IRAs, 401(k)s, and other tax-deferred accounts, which keep their original tax treatment.

Why the Tax Usually Disappears: Step-Up in Basis

Capital gains tax is calculated on the difference between what you sell an asset for and your “basis” in it. For property you inherit from a spouse, federal law replaces the original purchase price with the asset’s fair market value on the date of death.¹ If your husband bought stock for $20,000 and it was worth $150,000 the day he died, your basis becomes $150,000. Sell it the next week for $150,000 and there is no taxable gain.

How much of a jointly owned asset gets this reset depends on state law.

Common Law States

In most states, only the deceased spouse’s share of a jointly held asset receives the new basis. Your half keeps its original cost. Take a $400,000 asset the two of you bought together for $100,000: at your husband’s death, his half steps up to $200,000, and your half retains a $50,000 basis. Your combined basis becomes $250,000, so a sale at $400,000 produces a $150,000 taxable gain.

Community Property States

Nine states use community property rules: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.² In those states, both halves of community property receive a full step-up to fair market value when one spouse dies, including the surviving spouse’s own half.¹ In the same $400,000 example, the entire asset gets a new $400,000 basis, and an immediate sale produces no federal capital gains tax at all.

The $500,000 Home Sale Exclusion

If the asset in question is the family home, a second tax break stacks on top of the stepped-up basis. A surviving spouse can exclude up to $500,000 of gain from the sale of a primary residence, double the $250,000 single-filer limit.³ Between the two, most widows selling the marital home owe no federal income tax on the sale.

The full $500,000 exclusion requires all of the following:

The sale closes within two years of your spouse’s death.
You have not remarried before the date of sale.
You and your spouse used the home as your primary residence for at least two of the five years before the sale; your late spouse’s time counts even after death.
Neither spouse used this exclusion on a different home sale within the two years before this sale.

Sell more than two years after your spouse’s death, or remarry first, and the ceiling drops to $250,000. That is still meaningful, but on a home that has appreciated sharply since the date of death, the extra $250,000 of shelter can be worth tens of thousands in tax.

A partial exclusion may be available if you haven’t lived in the home long enough to meet the two-year residency test and the sale is prompted by your spouse’s death. The reduced amount is the months you did meet the test divided by 24, multiplied by $250,000.⁴ Eighteen months of qualifying use, for example, gives you 18/24 × $250,000, or $187,500.

What the Step-Up Does Not Cover

The basis reset does not apply to tax-deferred retirement accounts. Traditional IRAs, 401(k)s, and similar accounts are treated as “income in respect of a decedent” and are excluded from the step-up by statute.¹ Distributions from an inherited traditional IRA are taxed as ordinary income, the same way they would have been for your spouse.⁵

A surviving spouse has an option other beneficiaries don’t: rolling the inherited IRA into your own IRA, which lets you delay required distributions and treat the account as your own. The money is still ordinary income when you eventually withdraw it.

Other items that keep their original tax character include unpaid wages owed to your spouse, accrued but unreported savings bond interest, and deferred partnership income.⁵ Each represents income your spouse earned but never paid tax on, so the tax follows the income to whoever receives it.

Filing Status and the Rate You’d Pay on Any Gain

When a gain does exist, the rate you pay on it depends on your filing status and taxable income for the year.

In the year your spouse died, you can file a joint return, using the married-filing-jointly brackets. For the next two years, you may file as a “qualifying surviving spouse,” which uses those same brackets, but only if you have a dependent child living with you.⁶ Without a dependent child, you file as single starting the year after death, and the narrower single brackets can push more of a gain into a higher rate.

Inherited assets are automatically treated as long-term regardless of how long your spouse held them, so they qualify for the preferential long-term capital gains rates.⁷ For 2026:

0% on taxable income up to $49,450 (single) or $98,900 (joint or qualifying surviving spouse).
15% from there up to $545,500 (single) or $613,700 (joint or qualifying surviving spouse).
20% above those thresholds.

A large gain can also trigger the 3.8% Net Investment Income Tax when your modified adjusted gross income tops $200,000 (single) or $250,000 (qualifying surviving spouse or joint).⁸ Those thresholds are not indexed to inflation.

If the Asset Lost Value After Death

The step-up cuts in both directions. If an inherited asset is worth less when you sell it than it was at the date of death, you have a deductible capital loss. Losses offset capital gains dollar for dollar; if losses exceed gains, you can deduct up to $3,000 of the excess against ordinary income each year, with the rest carrying forward indefinitely.⁹

Documenting Basis and Reporting the Sale

Claiming the step-up means proving the date-of-death value. For real estate and high-value personal items like jewelry or artwork, that means a professional appraisal; residential appraisals typically run $525 to $1,300 depending on the property. For publicly traded stocks and funds, the closing price on the date of death, as shown on the brokerage statement, is your new basis.

Your taxable gain is the sale price minus the stepped-up basis and any selling costs. Capital improvements you make after the date of death, such as a new roof, added rooms, or central air conditioning, increase your basis further; ordinary repairs and maintenance do not.¹⁰

Report each sale on IRS Form 8949, showing the proceeds, adjusted basis, and gain or loss.¹¹ The totals move to Schedule D and then to your Form 1040. The gain belongs in the tax year the sale closes, and the return is due April 15. Form 4868 buys an automatic six-month filing extension to October 15, but any tax owed is still due April 15 and accrues interest and late-payment penalties if unpaid.¹²

1
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
2
Internal Revenue Service. Publication 555, Community Property
3
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
4
Internal Revenue Service. Publication 523, Selling Your Home
5
Internal Revenue Service. Publication 559, Survivors, Executors, and Administrators
6
Internal Revenue Service. Filing Status
7
Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
8
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
9
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
10
Internal Revenue Service. Publication 551, Basis of Assets
11
Internal Revenue Service. Instructions for Form 8949
12
Internal Revenue Service. Get an Extension to File Your Tax Return