Selling After a Spouse Dies: The Two-Year $500,000 Window and the Half Step-Up in Florida

A Deadline Most Widowed Homeowners Never Knew Existed

Margaret is 72 years old and lives in the home she and her husband Frank bought together in Ormond Beach back in 1998. Frank passed away last spring, and Margaret is now facing a question that thousands of Florida widows and widowers face every year: should she sell the house now, or wait until she is ready? The answer matters more than most people realize, because a federal tax rule quietly running in the background will cut her available capital gains exclusion in half the moment she misses a specific deadline. This article explains that rule, describes what happened to the home's tax basis when Frank died, and walks through what those rules mean for Margaret in practical terms.

Margaret is a composite for illustrative purposes and not an actual client, but the rules and numbers that apply to her situation are entirely real.

The $500,000 Exclusion and Why the Clock Is Ticking

Under the federal tax code, a married couple filing jointly can exclude up to $500,000 of capital gain from the sale of their principal residence, provided they owned the home and lived in it as their primary residence for at least two of the five years before the sale. That is the rule most homeowners know. What far fewer people know is what happens to that exclusion the moment one spouse dies.

Internal Revenue Code Section 121(b)(4) gives a surviving spouse a defined window to keep the full $500,000 exclusion. The conditions are specific. The home must be sold no later than two years after the date of the spouse's death. The surviving spouse must not have remarried before the closing date. Neither spouse may have claimed the exclusion on a different property within the two years before the sale. And the couple must have met the standard two-of-five-years ownership and use requirements, with one important grace: the deceased spouse's time of ownership and use counts toward satisfying the test.

That two-year period is 24 calendar months, not two tax years. A sale that closes on day 731 is one day too late.

After the window closes, the surviving spouse is treated as a single filer and may exclude only $250,000 of gain. In a market where Ormond Beach typical home values sit at approximately $367,000 according to the Zillow Home Value Index for July 2026, the math on a home purchased in 1998 for a fraction of today's value can produce a very large gain. Losing $250,000 of exclusion is not an abstract concern.

What Happened to the Basis When Frank Died

Florida is not a community-property state. That distinction matters here, because it changes how the IRS calculates the step-up in basis at death. In community-property states, both halves of a jointly owned home receive a step-up to fair market value when one spouse dies. In Florida, a common-law property state, only the deceased spouse's half receives the step-up.

Here is how that works in Margaret's situation. Suppose she and Frank paid $140,000 for the home in 1998 and made $20,000 in capital improvements over the years, producing an adjusted basis of $160,000. Each spouse's share of that basis was $80,000. When Frank died last spring and the home's fair market value was, say, $360,000, Frank's half stepped up to $180,000, which is half of the current fair market value. Margaret's half kept its original basis of $80,000. Her new combined basis is $80,000 plus $180,000, or $260,000.

If Margaret eventually sells for $380,000, her gain is $380,000 minus $260,000, or $120,000. With the full $500,000 exclusion available inside the two-year window, that gain is entirely sheltered. If she waits past the window, the exclusion drops to $250,000, and the gain is still fully sheltered at that sale price, but she has less cushion. For a longer-held home with a much lower original basis, the difference between a $500,000 exclusion and a $250,000 exclusion can represent a very real federal tax bill. A qualified CPA or tax professional should run the actual numbers for any specific situation before a decision is made.

Widowed homeowners moving to Florida from Arizona, California, Nevada, Texas, or another community-property state should discuss their situation with an estate attorney promptly. The step-up rules for community-property assets work differently and can be more favorable, but only if the assets were properly titled and documented under that state's law before the move.

Margaret's Two-Year Window in Concrete Terms

Frank died last spring. That means Margaret's two-year window runs through the spring of 2028. A closing that occurs by that date, assuming she has not remarried and meets all other conditions, preserves the full $500,000 exclusion. A closing that occurs in the summer of 2028, even by a week or two, eliminates it.

That timeline does not mean Margaret must rush. A well-prepared listing in Ormond Beach, with proper pricing strategy and disclosure compliance under Florida Statute Section 689.261 and the Johnson v. Davis standard for known material defects, typically moves in a reasonable time frame. The key is not to drift through the next eighteen months without a plan and suddenly find herself signing a contract three weeks after the deadline has passed. As an attorney-REALTOR®, I have seen that exact situation occur, and it is entirely avoidable with early planning. Understanding how real estate commissions work in Florida after the NAR settlement is one piece of the selling cost picture Margaret should also review early in her planning process.

Homestead, Save Our Homes, and What Continues for the Survivor

Margaret's homestead exemption does not disappear because Frank died. Under Florida law, the surviving spouse of a permanent Florida resident who held a homestead exemption may continue the exemption without interruption, provided she continues to use the property as her primary residence and meets the March 1 application deadline for any year in which a change in ownership or status needs to be reflected on the tax rolls.

The Save Our Homes assessment cap, which limits increases in the assessed value of a homestead property to three percent or the change in the Consumer Price Index, whichever is lower, also continues for the surviving spouse. Given that Margaret and Frank bought in 1998, the accumulated Save Our Homes benefit on the property may be substantial, keeping her assessed value well below market value and reducing her annual property tax bill accordingly.

If Margaret decides to sell and purchase a replacement home anywhere in Florida, she can transfer up to $500,000 of that accumulated Save Our Homes benefit to the new homestead through portability, provided she applies within the statutory window after establishing the new homestead. That benefit can significantly reduce the assessed value of a more expensive replacement home in communities from Palm Coast to Port Orange to DeLand, and it is worth factoring into any decision about whether and where to move.

Florida imposes no state income tax, no estate tax, and no inheritance tax, so none of those concerns enter Margaret's calculation. The only tax layer here is federal.

What This Meant for Margaret

When Margaret sat down to think through her options in the weeks after Frank's death, the picture looked like this. She had a two-year window ending in the spring of 2028 to sell and keep the full $500,000 exclusion. Her basis had been partially stepped up at Frank's death, reducing the gain she would recognize on a sale. Her homestead exemption and Save Our Homes benefit remained in place as long as she stayed in the home, and portability was available if she chose to buy something smaller in Volusia County or elsewhere in Florida.

Margaret decided she was not ready to sell immediately, which was entirely reasonable. What she did do was consult a CPA to confirm her gain calculation and verify the step-up figure, contact an estate attorney to make sure the title had been properly updated to reflect her sole ownership, and begin a conversation about listing timing so she could make a considered decision well before the two-year deadline, not in a panic at the last moment.

She also learned that the selling costs she would owe, including Florida documentary stamp tax on the deed at 70 cents per $100 of the sale price and other standard closing costs, should be planned for early, because net proceeds after taxes and costs are what actually fund whatever comes next in her life.

Planning ahead gave Margaret choices. Waiting without a plan would have quietly eliminated some of them.

Talk to the Right Professionals Before You Decide

The rules covered here are federal tax rules, not legal advice for your specific situation. A CPA or tax professional should calculate your actual gain, basis, and exclusion before you commit to a closing date. An estate attorney should confirm that title is properly vested in your name alone and that no probate or deed correction steps remain outstanding.

When you are ready to talk about pricing strategy, market timing in Ormond Beach or anywhere in Volusia County, and what selling costs to expect, I am here to help as both an attorney-REALTOR® and as someone who understands that a home sale after a loss is never just a transaction.

Contact Arthur Simpson, Esq., CIPS, at arthursimpson.com or through Realty Pros Assured in Ormond Beach. There is no obligation, and the earlier in the process you have the conversation, the more options you have.