Friday, March 11, 2016


When you buy a home your real estate agent will ask you how you want to hold title. As a married couple in California you have a few choices, with different legal and tax consequences.

Here is the analysis you need:

Joint tenancy

(the full name is joint tenancy with right of survivorship)

This type of title may be taken anytime there will be more than one owner of the property. It means that each person owns an undivided interest in the entire property. When one owner dies the remaining owners will automatically receive the deceased owner’s share – that’s the right of survivorship part. Because the deceased owner’s share automatically goes to the remaining owners probate can be avoided for this property – at least until the last owner dies.

It is important to note that a will or trust does not control where the property goes on the death of a joint tenant. So, sometimes joint tenancy is thought of as a quick estate plan. Because we are discussing married couples only, property taxes will not be reassessed upon the death of the first spouse. The tax basis of the property will be adjusted to fair market value for the half owned by the deceased spouse and this will reduce any capital gains taxes upon the sale of the property by the surviving spouse. This is a very common way for married couples to take title, but it’s not what I would recommend for most married couples in California because it doesn’t take advantage of the Double Step-Up in basis. Don’t know what a step-up in basis is? Read on!

What is a step up in basis?

In general, when you sell an asset that has appreciated in value, you pay taxes on the gain. For example, when you buy real estate, the “capital gain” is generally calculated as the difference between your purchase price and sale price. How much tax you have to pay for the capital gain depends on your tax brackets. However, there is a special rule for inherited property known as the Step-up in Basis rule. 

Here’s how it works: Roxanne inherits a house from a generous reader of her blog who bought the house in 1982 for $70,000. The home was worth $800,000 at the time of the wonderful reader’s death. If Roxanne decides to sell the house, her basis will be $800,000 so she will only be taxed on the difference between what she sold it for and her new stepped-up basis of $800,000. Without this step-up, Roxanne would be taxed on the difference between the sale price and $70,000.00.
But wait, it gets better! Read on for how to get a Double Step-up in basis!

Community Property

Those who reside in a community property state such as California can take advantage of the “Double Step-up in basis” rule with proper planning.
Here’s an example of how the “double” step-up basis works: Jack and Jill bought a house in 1982 for $70,000. When Jack dies Jill gets the full step-up basis for the house which was the market value at Jack’s death of $800,000. When Jill passes away later, the house is worth $850,000 which becomes the new basis for their sons who inherit it. In short, the children inherit a house that essentially has stepped up in basis twice to $850,000! Consider the amount of taxes the children would have had to pay if they had not been able to use the “Double Step-Up” rule. Thank you Uncle Sam!

Before you get too excited… if the property is not “community property,” but rather you or your spouse’s “separate property” you will want the competent advice of a family law attorney before you allow your estate planning attorney to call it “community property” just for the tax benefits or you might be very unhappy if you and your spouse get divorced.

But there is one problem with holding title as Community Property… no automatic right of survivorship.

Simply holding the property as “community property” will not automatically grant you and your spouse a right of survivorship to avoid probate. Thanks to a competent legislature, however, this problem has been solved for you. Effective July 1, 2001, California Civil Code 682.1 allowed a new type of property ownership: Community Property with Right of Survivorship.

Community Property with Right of Survivorship

The major benefit of holding title as Community Property has been a double step-up in basis at the death of a spouse. The major difficulty of Community Property is transferring full ownership to the surviving spouse when the first spouse dies.
Holding title as Community Property with Right of Survivorship gives you the double step up in basis and the ease of transferring the asset that comes along with the right of survivorship!

Note: you don’t need the right of survivorship once you transfer your house to a Revocable Living Trust because a Revocable Living Trust avoids probate.

But what about putting property into a Revocable Living Trust?

You need to be careful when your attorney transfers your home to your Revocable Living Trust out of Joint Tenancy. A well drafted Revocable Living Trust should always preserve Separate Property as separate. Therefore, simply transferring the property into a trust does not transmute the property into Community Property. There is a good reason for this: If a piece of property is Separate Property (maybe one spouse inherited it, for example) the owner may not want to gift an interest in that property to their spouse.

So if the property is held in Joint Tenancy it will be considered two separate property interests under the tax law and, even after it is put into the Trust, there will not be a double step-up in basis. The solution, if the couple wants the double step-up and wants the property to be community property, is to first transfer the property to community property and then put it in the Revocable Living Trust. Expect to pay your attorney more to draft the additional deed, but think of the tax savings over the long term!

By the way: There are some common pitfalls to avoid in order to take advantage of the Double Step-Up

Owning your home with your children: If you intend to avoid probate and for your children to own your real property when you pass, your children should inherit your property and NOT own it in common with you while you are alive. When you give someone an interest in your property while you are alive you also give them your basis— there is no step-up. There are other important reasons not to put your children on the deed. The first thing I think is liability— what if your child ends up in a situation where he or she has an aggressive creditor and your house is used to pay the liability? Another one is also financial, what if you find yourself in a situation where you want to sell the property or do a reverse mortgage?

Step-Down: The step-up can also be a “step-down” if values have dropped at the time of death – so you need to be aware of the market values of your assets and any adjustments you plan to make to the ownership/title of those assets.

As always, I must finish by saying that this is complicated stuff and you must have competent legal and tax advisors. Don’t try this at home by yourself! But, hopefully, this article has given you the language and the background to ask the right question of those competent advisors.

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