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New law benefits surviving spouse
By John Carman
For married couples who own property, there is a new law that can save them money in time of need.
The Community Property with Right of Survivorship law, which took effect July 1, is a new form of a holding title, redefining the process of real and personal property acquisition by a surviving spouse upon the other's death. This new way to hold title combines the advantages of Community Property and Joint Tenancy with Right of Survivorship laws.
Married couples who currently own real or personal property and hold title as Community Property or Joint Tenancy with Right of Survivorship can now transfer the holding title over to this new form of holding title. This transfer, however, will not create a change in ownership of the property until the proper paperwork is registered.
Choosing or changing the form of holding title is a large decision to make, so co-consultation with a legal or tax professional is always recommended. But it is safe to say that most couples will benefit greatly from this new ownership option.
If married couples change their holding title to Community Property with Right of Survivorship, they are reaping the tax benefits of community property law through double the stepped-up basis that would be received from a Joint Tenancy with Right of Survivorship title.
Now what does that mean? "Stepped-up basis" is a procedure in which the investment in the property is calculated against the value to determine what is owed in capital gains taxes when selling the property. So this new law reduces capital gains taxes when the surviving spouse actually sells the property, and by twice the normal reduction that would have been received from the sale of property that was acquired through joint tenancy.
The surviving spouse under this new way of holding title still gets the basis of the property adjusted on both halves as of the date of death, transferring the deceased spouse's interest by recording an affidavit. This law still permits the termination of the holding title prior to either spouse's death as well, and in the same fashion joint tenancy would be voided.
The only obvious disadvantage of changing the holding title to Community Property with Right of Survivorship as compared to Joint Tenancy with Right of Survivorship is that there would be at least one court hearing to actually transfer the property over, and extended probate or trust administration may be required.
Let's assume Dave and Nancy are happily married and bought a home at the beginning of their lives together for $100,000. Now that they are retired, they have paid off their home entirely. The value of their home has increased over the years to $500,000. The initial investment in the property was $100,000, so that amount also becomes their taxable basis. Thus, if they sell the home, they are taxed on the gain measured by whatever amount the sale brings in excess of $100,000.
Now, suppose Dave dies shortly after their appraisal and the home still holds value at $500,000. If Dave and Nancy held title as joint tenants, the law would give Nancy a "step-up" in the tax basis equal to her portion of the original investment (basis), plus half of the value of the home at the time of Dave's death. Let's do the math: $50,000, which is half of the investment (basis), plus $250,000, which is half of the current value, equals $300,000 for Nancy's "stepped-up basis." So if Nancy sells the property at $500,000, she will pay capital gains taxes on the difference between her stepped-up basis ($300,000) and the selling price ($500,000), which equals to a $200,000 capital gain.
If Dave and Nancy held title under the new law when Dave dies, Nancy would receive a complete step-up in the tax basis on their home. Nancy's stepped-up basis becomes the full market value of the property at the time of Dave's death ($500,000). Nancy is still taxed on the difference between her stepped-up basis and the selling price of her home, but if Nancy sells the property for its fair market value of $500,000, she realizes a capital gain of zero ($0)!
From a tax perspective, the benefit of this new law is clear. Laws that yield a tax benefit don't come around that often and don't always apply to everyone, but married couples can take advantage of this new form of holding title that is only available in a few states, including California. Before considering this new form of ownership, please seek guidance from a law or tax professional with real estate expertise to ensure it is the best decision for your situation.
John Carman is Manager of Coldwell Banker Northern California's Los Gatos office.
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Cupertino, California Since 1947
