Purchased and lived in a home for last 15 years. Wife died in February 2015. Sold home in April 2018. My trust lawyer stated that the capital gains relative to the sale is: selling price minus the appraised value at the time of my wifes death. And that there is no requirement that the sale be within 2 years of her death. I talked to several CPA's some of which agreed and some not, but none would provide an IRS Code to justify such a rule. This sems to violate everything iin IRC 121 "Exclusion of Gain from Sale of Principal Residence" and I am afraid to use it without a reference to an IRS Code. Is there an IRS Code allowing this, and if so, what is it?

When the owner of a home dies, the tax basis of the property I mean the amount from which gain / loss is determined upon sale is usually stepped up to the date of death value. When a married couple owns a primary home jointly, at least half of the basis is stepped up , however, in community property states, the entire basis is stepped up. So unless you file your return as MFJ , you will be limited to $250k of tax-free profit when you dispose of the home. But the taxable gain may be smaller than you imagine because part or all of the profit that built up while your spouse was alive will be ignored by the IRS. As you said, your spouse died during the year of 2015, you are considered married for the whole year of 2015 for filing status purposes.also unless you remarried before the end of the tax year of 2015, you can file a joint return for yourself and your deceased spouse on your 2015 return. For the next 2 years, both 2016 and 2017, you may be entitled to the special benefits described later under Qualifying Widow(er) With Dependent Child and may claim $500K of tax freew profit. On your 2018 you may claim only $250K of tax free profit on the sale of the home.ypu can refer to pub 501