Community Property with Right of Survivorship in California
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What Is Community Property with Right of Survivorship?
Community property with right of survivorship is a relatively new form of owning real property, created by the California legislature in 2001. It combines the security of owning property as joint tenants with the tax benefits of California’s community property system.
Pitfall of Community Property System: Interests Are Freely Devisable
Under a community property system, assets purchased with marital earnings, including real estate, are owned equally by both spouses. Each spouse has a one-half interest in the asset and is free to dispose of their half interest in the asset as they see fit. Thus, one spouse might create a will leaving his half of the community property to someone other than his spouse.
How a Joint Tenancy Can Help
A joint tenancy, often called a joint tenancy with a right of survivorship, also grants each party a one-half interest in a piece of real estate. However, when one joint tenant dies, his property interest passes immediately to the remaining joint tenant. A joint tenant has no right to create a will leaving his half of the property to someone else. The surviving joint tenant is protected.
Why Not Just Go with Joint Tenancy?
Many people do not realize that community property offers greater tax relief than joint tenancy. Generally, any net income from real property sold is capital gain and is taxable. The depreciated value of the investment (the "basis") is subtracted from the sale price, and the difference is taxed:
- 1995 Purchase price: $100,000
- 2010 Basis (depreciated value): $50,000
- Sale price: $400,000
- $350,000 is taxable
Joint tenants enjoy the benefit of what is called a step-up basis. When one joint tenant dies, the property automatically passes to the surviving joint tenant. The basis of the deceased joint tenant’s property interest "steps-up" to the value of the property at the time of his death:
- Basis: $50,000 ($25,000 for each Joint Tenant’s half-interest)
- Joint Tenant A passes away; the property is now worth $400,000
- Joint Tenant B’s new basis is $225,000 (B’s basis of $25,000 + A’s step-up basis of $200,000)
- If surviving Joint Tenant B sells the property for $400,000, only $175,000 is taxable
The tax benefits are even greater for community property, which receives a "double step-up" in basis. When one spouse dies, the basis in both spouses’ half-interest is stepped-up to the value of the property at the time of death:
- Basis: $50,000
- B passes away, leaving his half of the property to A; the property is now worth $400,000
- A’s new basis is $400,000
- If A sells the property for $400,000, nothing is taxable
Community Property with a Right of Survivorship
Community property with a right of survivorship is a hybrid of these two forms of real property ownership. It protects surviving spouses by preventing either spouse from passing the community property asset to someone else by will, and also allows the surviving spouse the tax benefit of the double step-up.
Do I Need an Attorney’s Help?
Community property with a right of survivorship is established by filing a title document with the County Recorder’s Office. An experienced estate planning attorney can help you decide if community property with a right of survivorship is the best form of property ownership for you and your spouse, and help you create and file the title document.
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Last Modified: 10-03-2016 09:30 PM PDT
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