Community Property with Right of Survivorship is a relatively new way for married couples to hold title to property in California. It combines the best features of Joint Tenancy and Community Property and enables property that was deeded after July 1, 2001 to pass to the surviving spouse without having to go through estate administration known as probate.
Historically the benefit of holding title has been a double adjustment in the income tax valuation of inherited assets to reflect the new fair market value at the time of death of a spouse.
The following is an example of how the taxable profit from selling a property can be affected by holding title as Community Property, Joint Tenancy or Community Property with ROS (Rights of Survivorship).
Charlotte and Jake bought a house in 1989 for $100K. Five years later they moved out converting it into a rental. After many years, the rental property has depreciated down to a basis of $40K while the value has risen substantially. If it sells for $300k (after commissions and costs of sale) the story has 3 possible endings, depending on when it is sold and how they hold title.
1.Taxed to the Max
Jake gets terminally ill. During this time Charlotte sells the property. The profit ($300K-basis of $40K) $260K is taxable.
2. Lower Taxes Higher Fee
Jake passes away. Charlotte sells the property immediately thereafter. The amount of taxable profit depends on how they hold title. If held as Joint Tenants, the basis in inherited property is adjusted to the date of death value. This would apply to the half of the property Charlotte inherited from Jake. The other half that she already owned was valued at $20K (1/2 of $40K basis) and stays the same. Jake's half, now owned by Charlotte is adjusted to $150K. Charlotte's new basis, her $20K plus Jake's $150K is now $170K. When she sells for $300K only the difference of $130K is taxable. Under Joint Tenancy the property automatically passes to Charlotte without passing through probate thus avoiding the delay and the expense associated with the process. Unfortunately under Joint Tenancy only the deceased spouse's one half interest obtains an adjusted tax basis, which is equal to one half the fair market value of the property at the time of death. If held as Community Property each spouse owns the entire property so Federal Tax Law says that the basis is adjusted to the date of death value for the entire property. Charlotte's basis is now $300K. When she sells for $300K, nothing is taxable.
However a drawback as vesting Title as Community Property is the legal expense often required to process the estate through probate. Probate fees typically equal about 5% of the gross value of the estate. Probate takes a year but can easily last twice that. During that time hearings are held before assets are sold or money paid out to the family.
3. No Taxes-No Fees
If held as Community Property with ROS upon the death of either spouse property automatically passes to the surviving spouse without probate and the property receives a 100% adjustment basis for tax purposes. This allows the inheriting spouse to avoid probate and sell immediately, if desired, with no taxable proceeds from the sale.
How you hold title can greatly affect the outcome of a sale. Contact your tax advisor to find out about your unique situation. Contact Ivan Solis at Lawyer's Title for all your Title needs in San Diego, CA.
Contact me for all your Real Estate needs.
Deborah A. Stone, Realtor Integrity-Solutions-Results-
Hogue and Belong Realty-Bankers Hill
San Diego, CA
"Representing clients with the experience of an investor"
