Thursday, January 24, 2008

Till Death Do Your Equity Part

We recently came across this article in the California Association of Realtors Magazine and thought it would be useful to you.

"Till Death Do Your Equity Part "
By William Cuthbertson, MBA

You’re at the escrow office finalizing the purchase of your new home, when you’re asked, “How do you want to take title?” You’re told, “There are three primary forms of property ownership in California available to married couples: tenants in common, joint tenants with rights of survivorship, and community property with rights of survivorship.” Armed with that information, you’re even more confused. What will you do?

If you’re like most married property owners, you’ll probably choose joint tenancy. However, if you don’t have a particularly unique legal situation, and you’re a savvy home buyer, community property with rights of survivorship (CPWROS) may be your best option.
Why? Because you want the best tax treatment possible for your surviving spouse in the event they decide to sell the property after your death.

In 2001, it became legal in California for married property owners to take title as CPWROS. Doing so allows married property owners to take advantage of the same automatic title transfer rights provided upon death for joint tenancy title holders, while also benefiting from the improved tax treatment allowed by virtue of holding title as community property.

The tax advantage of CPWROS occurs because of the way tax law adjusts the reported cost of a sold property whose title has changed due to the death of a spouse. In tax talk, this reported cost is called tax basis. In this situation, the tax basis for the entire property in the hands of a surviving spouse is generally stepped up, to an amount equal to the fair market value of the property on their deceased spouse’s date of death.

Consequently, if the property is sold for fair market value, there would be zero gain to report. Whereas, if the property had been held under joint tenancy, only the half share of the property attributed to the deceased spouse would have increased to fair market value, potentially resulting in a much less desirable result.

Property title changes for already held property can generally be accomplished quite easily. If you are uncertain how to proceed, you should contact a competent legal and/or tax advisor.

Death and Taxes
Consider these two examples and their resulting differences.

Common Assumptions

Purchase Price (Original basis): $500,000

Fair Value: $1,000,000

Gain Calculation for Joint Tenants

Sales Price: $1,000,000

Stepped Up Taxable Basis: - $750,000

Gain = $250,000

Gain Calculation for Community Property with Rights of Survivorship

Sales Price: $1,000,000 Stepped Up Taxable Basis - $1,000,000

Gain = $0

The difference in these two examples results from the manner in which the taxable basis is adjusted at death between the two property titling forms.
William Cuthbertson, MBA, is a San Juan Capistrano-based Certified Financial Planner™ professional, and also is enrolled to practice before the IRS and state taxing authorities.

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If you have any questions about holding title, please be sure to consult your attorney or CPA. If you have any questions about probate and trust real estate please contact us, your Probate Realtors at 310-777-2858 or visit our website at