The basis in your home is its value for tax purposes. It can be increased by changes such as home improvements.
When your home is sold, the capital gain on the sale is calculated as the difference between the sale price and the home’s basis. If you have been in the home for many years and the home has appreciated, the capital gain could be large, and subject to a large capital gains tax.
Fortunately, where the primary residence is sold and it was the principal residence for two of the last five years before the sale, individuals may typically exempt up to $250,000 in federal capital gains taxes. Couples may typically exempt up to $500,000 in capital gains taxes under these conditions.
If you want to give your home to another, it is typically much better to leave the home to an heir in a will bequest than to gift the home to the recipient during life.
When your home is passed down to a beneficiary in a will, the beneficiary frequently benefits from a “step up in basis,” where your basis in the asset is updated to the current market value of the home. If the home has appreciated since its original purchase, this “step up in basis” may save the beneficiary thousands of dollars in capital gains taxes.
This rule may be more complicated in cases where the bequest is made to a spouse, and where the home is held jointly with right of survivorship.
Avoid Taxes on Your Home Sale Legally, THE HUFFINGTON POST (October 20, 2015), http://www.huffingtonpost.com/moneytips/avoid-taxes-on-your-home-_b_8307234.html.