Tax Issues in Joint Tenancy Property.
In the prior page we explained the ownership problems that exist when property is held in joint tenancy. THERE IS A TAX DISADVANTAGE, and the tax disadvantage is the following:
When a person dies, his or her interest in property, real or personal, gets revaluated for estate tax purposes. Whoever receives this property receives it with a new revaluated tax basis (stepped up). IRC §1014(a)(1). If the property has gone up in value from the time that it was purchased, the new value becomes the tax basis (tax cost). If the person that gets the property sells it soon, there will not be a tax on the appreciation.
Under federal tax law, if the property is held as community property, the entire property gets a new tax value. IRC §1014(a)(6). If the property is held in joint tenancy, only the one half that belonged to the person who died gets a new value. In California, property acquired during marriage is presumed to be community property, unless proven otherwise. The fact that the property was acquired in joint tenancy might destroy this presumption, if so, the property will be presumed to be an undivided one half interest in non-community property.
Example:
Husband and Wife own a vacation home (Not their principal residence) as community property. They paid $50,000 for it in 1976. The current market value is $600,000. If they sell the house there would be a $550,000 taxable gain. If Wife dies, her one half gets step up, but also his one half. If Husband sells the house right after her death, his basis would be $600,000, therefore, there would not be a taxable gain. However, that one half of the $600,000 value would be part of her estate for estate tax purposes.
The danger. If the property's title is acquired in joint tenancy the IRS might claim that the community property status was destroyed, therefore, only the one half of the deceased spouse's share gets a step up basis. The result would be a $275,000 taxable gain on the sale computed as follows:
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Sales price
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$600,000
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Basis:
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His share
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25,000
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Her share (stepped up)
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300,000
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Total basis
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325,000
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Taxable gain
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$275,000
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How to avoid this problem? Obviously, by having the title as community property. If not, by evidence that the spouses had a clear intent to hold the property as community property. This clear intent may be evidenced by either a joint will, or a notarized statement in writing showing the intent of the parties. Example:
" We _______________ and _______________, husband and wife, hold the property at _________________________ as joint tenancy for the purpose of facilitating transfer of title. Our clear intent in such property is for it to be community property for any other purpose, including tax valuation.
The irony of this is that it is just as easy to clear the title when one spouse dies under community property as is under joint tenancy. In either case, the title passes to the survivor without probate administration. CC 682.1.
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