| I assume that she was a widow and at some point her husband lived in and owned the house also and did not die during 2005. I also am assuming that the house was sold during 2005. She can exclude up to $250,000 in profit on her Federal income tax return. The profit is the sales price minus the closing costs and her basis in the house. Her basis is a little complicated to calculate. Half of her basis is half of the cost of the house plus half the closing costs at purchase and half the costs of any major improvements such as additions or major remodeling projects. The other half of her basis is half what the house was worth the day her husband passed away. All profits over and above the $250,000 are taxed as long term capital gains most likely at a rate of 15% on her Federal return. I know very little about New York state tax returns, but New York and possibly the city she lived in might tax the proceeds from the sale of the house. If that makes no sense to you, I'd be happy to create an example with numbers. Good Luck Joan | 
