Category Archives: Estate Planning

Community Property with Right of Survivorship

Effective July 1, 2001, California Civil Code section 682.1 was amended to allow a new type of property ownership: Community Property with Right of Survivorship.

Holding title in real property as Community Property has been a “double step-up in basis” on the death of a spouse. The major problem of Community Property is that it doesn’t transfer full ownership to the surviving spouse when the first spouse dies.  Before 2001, many married couples were advised by their realtor to hold title to property as Joint Tenants.  Unfortunately this may not be advantageous because they do not understand how the step-up in basis works.

Assume that Daniel and Harriet  and Harriet bought a home in 1975. 5 years later they moved out, converting it into a rental. Daniel manages the property; Harriet hates dealing with it. Many years later the rental property has been depreciated down to very little. More importantly, the value has risen to unbelievable levels.

Let’s assume that Daniel and Harriet bought the property for $40,000, and depreciated it down so the basis is $20,000. It now sells for $350,000 (after commission and costs of sale).

This scenario has three possible outcomes depending on when it is sold and how title was held.

  1. The Bad Outcome
    Daniel gets sick; while he is on his deathbed Harriet sells it before Daniel dies. The profit, $350,000 – $20,000 = $330,000 is taxable.
  2. The Good Outcome
    Daniel dies; Harriet sells it even before the body is cold. Believe it or not, the amount of taxable profit depends on how title was held!

Joint Tenants: The basis in inherited property is stepped-up to the date of death value. Harriet “inherited” ½ from Daniel; she already owned her half.

Harriet’s basis was $10,000 (½ of $20,000). It stays the same. She already owned it and did not inherit it.
Daniel’s ½ (now owned by Harriet) is stepped-up to $175,000.
Harriet’s basis is now $185,000.

When she sells for $350,000, only $165,000 is taxable.

  1. The Best Ending
    Community Property: Federal tax law states that the basis of 100% of Community Property is stepped-up to the date of death value.

Harriet’s basis is now $350,000.

When she sells for $350,000, nothing is taxable.

Community Property with Right of Survivorship.
The law effective 7/1/01 allows the best of both worlds.  It provides the simplicity of Joint Tenancy while providing the tax benefit of Community Property by the creation of Community Property with Right of Survivorship.

For simplicity we have assumed that Harriet will sell instantly on Daniel’s death. In the alternative, she may hold the property as a rental and enjoy the greater depreciation that applies after the step-up in basis.

A Preliminary Change of Ownership Report must accompany the Deed to the local Recorder’s Office.  Check Box A to report that this Deed is a spousal transfer, exempt from property tax re-assessment as an exempt transfer under Proposition 13.

Note:  A Living Trust is a better tool than the Community Property with Right of Survivorship.