CAPITAL GAINS CONSEQUENCES UPON DEATH DEPENDING ON HOW YOU HOLD TITLE TO YOUR HOME
There are many ways to hold title to a property; Community Property, Community Property with Right of Survivorship, Joint Tenancy, Tenancy in Common, Partnership, Trust, but the two most common ways title is being held for married couples on their single family residence in California is: Joint Tenancy and Community Property with Right of Survivorship. The difference poses the potential for very important LONG TERM CAPITAL GAIN EXPOSURE if/when one of the spouses pass away.
Here is an example of what can happen in both scenarios for holding title currently in California:
COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP
Married couple purchase a home for $100,000 and own it for 10 years. The home appreciates to $1,000,000, and the husband passes away. The wife gets to step up her cost basis to the $1,000,000 value that the home is worth upon the spouses death, and will only incur Capital Gains taxes if she sells her home for more than $1,250,000 ($1,000,000 value upon spouses death, plus her $250,000 Capital Gains Tax exemption).
Same scenario, married couple purchase a home for $100,000 and own it for 10 years. The home appreciates to $1,000,000, and the husband passes away. $500,000 will be attributed to the deceased spouse’s estate (one half of the property value), and the wife would have to pay approximately 15-20 percent in estate taxes on the $200,000 Capital Gain – (her $450,000 half of the gain, minus her $250,000 exemption) which would cost her between $30,000 and $40,000!
Do you know how you are holding title?! Since I am forbidden from giving tax or legal advice, you should consult with your attorney or tax advisor to learn more about the ins and outs of each option.