Q. My husband and I purchased our home almost 29 years ago for $83,000. The builder included some upgrades so the purchase price came to approximately $100,000. Over the years, we have added improvements of approximately $50,000, and I have the receipts in our files.

My husband died in l997, but I continued to live there. I am now contemplating selling the property, and a local real estate agent has indicated that it will probably sell for $800,000. By my calculations, I will have made a profit of approximately $650,000 ($800,000 - $150,000), and will have to pay capital gains tax of 20 percent of that gain, or $130,000. This money is very important to me, and I need to find a way to save or lower my tax obligation.

On the date of my husband’s death, I had to obtain an appraisal, and it was valued at $530,000.

A. You have forgotten two very important tax benefits: the “stepped-up” basis and the $250,000 absolute exclusion of gain.

Let’s look at the stepped-up basis first.

Oversimplified, the basis of inherited property for income tax purposes is the fair market value of the property at the time of the decedent's death. This is commonly referred to as the "stepped-up" basis rule.

In your case, you and your husband purchased the property for $100,000 and added $50,000 of improvements. Thus, for tax purposes, since you held title as Tenants by the Entirety, we divide that basis in half. Your basis is $75,000 as was your husband’s.

On his death, the property was valued at $530,000. Thus, his basis was $265,000, and because of the stepped up basis, you inherit his basis on the date of death, and thus for tax purposes your basis becomes $340,000 ($265,000 + $75,000). In other words, your basis is “stepped up”.

Now, if you sell the property for $800,000, forgetting for this discussion any closing costs which can be included to reduce this basis, your profit -- capital gain -- is only $460,000, and the tax on that would be $92,000.

However, now let’s look at the second tax benefit. Since you will have lived in the property -- as your principal residence -- for two out of the last five years before it is sold, you have the absolute right to exclude up to $250,000 of this gain. Note that if you are married, and file a joint tax return, you can exclude up to $500,000 of gain.

Accordingly, you will only have to pay tax on $210,000 ($460,000 - 250,000), which under current tax law will cost you $42,000. You should consult your tax advisor, because depending on your income, the capital gains tax rate may be considerably less. If, for example, you are in the 15 percent tax bracket -- and you have held your property for at least five years -- the rate is only 8 percent.

Keep in mind that we are only discussing income tax and not inheritance tax, or any applicable local or State taxes.

According to the Tax Code, the stepped-up basis applies to property "acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent. . ." This means that whether the decedent has a will, or dies intestate (without a will), the beneficiary is eligible for that stepped- up basis.

Unfortunately, you will still have to pay some capital gains tax, but clearly not at much as you thought. Additionally, make sure that you have included every dollar of improvements which you have made to the house. Even if you do not have receipts, the IRS will consider the reasonable value of those improvements if they are satisfied that you, in fact, made them.

Finally, many expenses which you incur in connection with the sale -- such as real estate commissions, fix up costs and closing costs -- can be used to reduce your overall gain.

Talk with your tax advisor before you commit to a sale. There are many hidden benefits which you want to take -- if you know what they are.