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Frequently Asked Questions (FAQs)

Joint tenancy, Community Property, Domestic Partnerships

If the surviving spouse becomes the sole owner of the family home when one of us dies, what difference does it make whether our home is community property or not?

• Step Up. When an individual dies, the income tax basis of assets owned at death are “stepped-up” to the value at death. (See answers to FAQ regarding taxes.) The step-up can provide a huge tax benefit to the beneficiaries upon the subsequent sale of the assets. For income producing property, the step-up means that far greater depreciation is available for income producing property.

• Double Step Up. All community property, not just the half interest of the deceased spouse, acquires a stepped-up basis at the death of either spouse. For example, if a couple purchased a home in the 1950s for $15,000, their basis is $15,000 plus the cost of improvements they have made. If the value of the home is $750,000 when the first spouse dies, the entire home, not just the half belonging to the first spouse, acquires a stepped-up basis. The same applies to other assets such as securities. That full step-up dramatically increases financial and estate planning options for the surviving spouse.

• Half Step Up. If the asset is not community property, only the interest of the deceased spouse is stepped up. In the above example, assuming there were no improvements to the property and the home was not community property, the interest of the deceased spouse is stepped up to $375,000 (half the value at death) while the basis for the surviving spouse’s interest remains at $7,500, half of the original basis. The surviving spouse’s new basis is therefor $382,500 ($375,000 plus $7,500). If the surviving spouse elects to sell the home, he or she may well face a capital gains tax even after the exclusion of $250,000 on the sale of a residence.