home registered as joint tenant, or community property

[fh2000]

I am in California, a community property state, though our primary residence is registered as Joint Tenant.

Owning it as Joint Tenant means that if one of us dies, half of the cost base of the house has a 'step up' increase; whereas owning it as Community property will have a 'step up' for all of the cost base. That might give us an impression that there is a benefit of changing it to Community Property.

Since our capital gain is 300K today if we sell it. If we change it to Community Property and one of us dies, the capital gain will be $0. If we leave it as Joint Tenant, and one of us dies, half of the cost base step-up will leave the surviving spouse 150K capital gain, which is less than the home sale tax exclusion 250K. Therefore still no tax.

Looks like no benefit to change it, right?

 

[Souschef]

Yes, that is true if it is your principal residence. If for some reason you change it into a rental, only half the basis will be stepped up. When you sell the house, you may incur capital gains on it.

 

[Senator]

What do you want to happen to the property when one of you dies? That should be the consideration, not the capital gains.

Do you want the dead partner's share to go through probate? Get willed to someone else?

 

[fh2000]

What do you want to happen to the property when one of you dies? That should be the consideration, not the capital gains.

Do you want the dead partner's share to go through probate? Get willed to someone else?

We plan to sell in 10 years. If one of us dies early, the surviving spouse will just sell and rent close to one of our children.

 

[Senator]

We plan to sell in 10 years. If one of us dies early, the surviving spouse will just sell and rent close to one of our children.

If you own with Tenants in Common, I believe you go through probate. The survivor does not automatically get title. And it could be a contested will, and you wind up not owning the other half, ever.

 

[Done]

Property held in Joint Tenancy won't go through probate when one owner dies. California also allows you to hold title as Community Property with right of survivorship to keep it out of probate.
http://www.nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter6-5.html

In your case, it won't make a difference for the survivor's capital gains tax because of the exclusion for a primary residence, but if the property appreciates significantly or you decide to move but keep the house, you may want to change it to community property. Also consider holding other appreciated assets (such as brokerage accounts, real estate and collectibles) as community property. We decided to do this through a revocable living trust which defines everything in the trust to be community property. This avoids probate and gives the surviving spouse a full step-up in basis.