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.
If you live in a community property state such as California, you and your spouse or registered domestic partner can avoid going to probate by taking title to property as community property the right of survivorship.
To create Community property with right of survivorship, the property that you wish to have the right of survivorship must be in a community property state. To turn property into right-of-survivorship community property, you simply need to put the right words on the title document. In California, all the couple has to do is put in writing the following clause in the title document: “Couple take title to property as Community property with right of survivorship.” To remove the community property with the right of survivorship, the spouses can simply remove the survivorship provision from the title document and prepare a new title document that does not include the right of survivorship.
Under a community property system when the first spouse dies and the property, the entire property automatically transfers to the survivor and the property does not need to go through probate to be transferred to the survivor. The process becomes a lot easier when the property does not have to go through probate court to be transferred.
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.
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.
Many people do not realize that community property offers greater tax relief than joint tenancy. Generally, any net income from real property sold is a 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 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.
Community property with a right of survivorship is established by filing a title document with the County Recorder’s Office. An experienced California 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.