Death of US Citizen (Can. Res.) w/US Cit. & US Res. spou

[jlodge]

Looking for help with the following scenario. I tried a search here first but didn't turn up anything. Seems like the treaty covers every scenario but this one:

Decedent was a US Citizen and a Canadian Resident. Decedent's spouse is a US Citizen and a US Resident. Decedent owned a 1/2 interest in the decedent's home and the spouse owned the other half. Decedent's 1/2 interest will go to spouse.

So, it's my understanding that the decedent has a deemed distribution subject to Canadian capital gains tax and the spousal rollover/deferral is not available because the spouse is not a Canadian resident. And there is no offset because full marital deduction applies for US estate tax.

So what's a spouse to do so as to not get double-taxed?

Does the US basis of the decedent's 1/2 interest automatically go up in the hands of the spouse? Or, do you put the deemed Canadian sale on the decedent's final US 1040 and offset the US tax with credit for Canadian capital gains tax, thereby also increasing the US basis of the decedent's 1/2 interest to FMV in the hands of the spouse? That's my best guess. I can't find any authority yet, though, for including the Canadian deemed sale on the final US 1040.

Thanks.