Converting House Title From Joint Tenancy To Community Property After Spouse Dies

[HMR2]

My late wife and I purchased our home in California in 1992 as joint tenancy ownership. She passed away in 2006. It's my understanding that I can convert the ownership from joint tenancy to community property in order to maximize my step-up basis when I sell the house. Is this true and, if so, can you please expand on this procedure ? Thank you.

 

[TrustUser]

My late wife and I purchased our home in California in 1992 as joint tenancy ownership. She passed away in 2006. It's my understanding that I can convert the ownership from joint tenancy to community property in order to maximize my step-up basis when I sell the house. Is this true and, if so, can you please expand on this procedure ? Thank you.

i am not an expert, but i thought that community property is only for married people, or registered partnerships ? i was assuming you were talking about your late wife ?

 

[Taxing Matters]

My late wife and I purchased our home in California in 1992 as joint tenancy ownership. She passed away in 2006. It's my understanding that I can convert the ownership from joint tenancy to community property in order to maximize my step-up basis when I sell the house. Is this true and, if so, can you please expand on this procedure ? Thank you.

There is nothing you can do at this point to change the nature of the title you had with your late wife. That being said, if I assume you were married at the time you bought in in 1992 and community funds were used to buy it then the home would have been community property during your marriage and you'd benefit from the step up in basis to the fair market value (FMV) of the property on the date of her death. Whether an asset is community property is not at all dependent on how the title between husband and wife is stated on the deed. You may wish to see a California tax attorney to review the facts of your marriage and the ownership of the house to determine your basis in the house. I suggest an attorney here rather than any tax professional because a legal opinion on the community property status of the home would be needed here, which is something that other tax professionals are not able to provide.

 

[TrustUser]

as far as i know, you inherited your late wife's half of the community property, and you now own the property all by yourself. if you havent done so, you should record your late wife's death certificate

 

[HMR2]

There is nothing you can do at this point to change the nature of the title you had with your late wife. That being said, if I assume you were married at the time you bought in in 1992 and community funds were used to buy it then the home would have been community property during your marriage and you'd benefit from the step up in basis to the fair market value (FMV) of the property on the date of her death. Whether an asset is community property is not at all dependent on how the title between husband and wife is stated on the deed. You may wish to see a California tax attorney to review the facts of your marriage and the ownership of the house to determine your basis in the house. I suggest an attorney here rather than any tax professional because a legal opinion on the community property status of the home would be needed here, which is something that other tax professionals are not able to provide.

So, in your opinion, the lower ( 1/2 step up ) shouldn't apply in my case even though the property was titled in joint tenancy back when we bought it in 1992 ? Therefore, here in California I would be entited to the full step up to FMV at the time of her death ? Thanks for any follow up.

 

[HMR2]

as far as i know, you inherited your late wife's half of the community property, and you now own the property all by yourself. if you havent done so, you should record your late wife's death certificate

See my reply to Taxing Matters ...

 

[adjusterjack]

I think you only get the step up on the half you inherited from your wife. But don't take my word on it. Consult a tax attorney. Too much money at stake.

 

[HMR2]

I think you only get the step up on the half you inherited from your wife. But don't take my word on it. Consult a tax attorney. Too much money at stake.

That's the core question. I've read a couple of discussions that state that I can convert from joint tenancy to community property after a spouse dies. One source even stated that Federal law allows for a retroactive change to community property after a spouse dies. Another says a simple signature in a will or document acknowledging it as community property is sufficient.

 

[Taxing Matters]

So, in your opinion, the lower ( 1/2 step up ) shouldn't apply in my case even though the property was titled in joint tenancy back when we bought it in 1992 ? Therefore, here in California I would be entited to the full step up to FMV at the time of her death ? Thanks for any follow up.

What I stated is that the home would have been community property given an assumption that it was purchased during the marriage and paid for with community funds. If that assumption is correct then yes, the entire property gets a step up in basis to the FMV on the date of her death. It matters, though, the extent to which it was community property. At least one half of the community property had to be includible in your wife's estate for that to occur. But I don't have all the facts concerning your marriage and the ownership of the house, hence my recommendation that you see a tax attorney to have him/her review the facts and give you an opinion on that and on what your basis in the home is.

I think you only get the step up on the half you inherited from your wife. But don't take my word on it. Consult a tax attorney. Too much money at stake.

Not if the home was community property at the time the OPs wife died. In that case, quite often there is a step up in basis for the entire property, not just the half owned by the decedent spouse. This is one unique tax advantage of community property over other forms of joint ownership of property. As the IRS states in Publication 551:

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return.​

 

[Taxing Matters]

That's the core question. I've read a couple of discussions that state that I can convert from joint tenancy to community property after a spouse dies.

You cannot retroactively change how the property was held. What you can do is assert that under the facts of how the property was owned and the the state law that applies the property was community property rather than just owned as joint tenants with a right of survivorship (JTWROS). Whether a particular property is community property is not dependent on the title shown on the deed. Rather, most property acquired in a community property state by either spouse during the course of the marriage is community property regardless of which spouse is shown on the deed as the owner. There are some things, like property acquired by gift or inheritance, that may be separate property, however. While there might be an initial presumption that the property was simply owned JTWROS when the title states that is how the property is held, that can be overcome by showing that given the applicable facts and state law, it was community property at the time the spouse died.

 

[HMR2]

You cannot retroactively change how the property was held. What you can do is assert that under the facts of how the property was owned and the the state law that applies the property was community property rather than just owned as joint tenants with a right of survivorship (JTWROS). Whether a particular property is community property is not dependent on the title shown on the deed. Rather, most property acquired in a community property state by either spouse during the course of the marriage is community property regardless of which spouse is shown on the deed as the owner. There are some things, like property acquired by gift or inheritance, that may be separate property, however. While there might be an initial presumption that the property was simply owned JTWROS when the title states that is how the property is held, that can be overcome by showing that given the applicable facts and state law, it was community property at the time the spouse died.

So, in your opinion, is the bottom line that California's community property status overrides the joint tenancy title that I'm inquiring about ? As a result, I should be entitled to the full step-up to FMV at the time of her death ? TIA.

 

[Taxing Matters]

So, in your opinion, is the bottom line that California's community property status overrides the joint tenancy title that I'm inquiring about ? As a result, I should be entitled to the full step-up to FMV at the time of her death ? TIA.

Again, I've not reviewed the specific facts of the ownership of your home. However, assuming that under California law the home was community property and that you each owned a 50% community property interest in it (which is the most common situation for property purchased by a married couple in California) then you would indeed get the benefit of the full step up in basis to FMV on the date your spouse died. The title described on the deed to the property does not determine if the property is community property. Even if you held it just in your name alone it may still have been community property. Check with a tax attorney to verify the extent to which this home was community property and to see what you need to do to establish the basis. You'll need a reliable appraisal of the property showing what it was worth (i.e. what comparable properties in your area would have sold for) at the time your wife died to help you determine what your basis is. The sooner you get that, the better.

 

[zddoodah]

It's my understanding that I can convert the ownership from joint tenancy to community property in order to maximize my step-up basis when I sell the house. Is this true and, if so, can you please expand on this procedure ?

I'm not sure what "step-up basis" means, but California law states that real property purchased by spouses and titled as joint tenants is treated as community property.

Of course, since your wife's been dead for 15 years, it's a moot point. After she died, did you record an affidavit of death of joint tenant or affidavit of surviving spouse succeeding to title to community property"? If you're selling the property, you'll have to do that before you can transfer title. You can't go back in time and change the nominal joint tenancy to community property.

in your opinion, is the bottom line that California's community property status overrides the joint tenancy title that I'm inquiring about ?

I'm not entirely sure what this question means, but I believe my statements above answer it.

 

[Taxing Matters]

I'm not sure what "step-up basis" means

[/QUOTE]

When selling any property (whether real, personal, or intangible) the gain realized on the sale for federal and California income tax purposes is determined by subtracting the taxpayer's adjusted basis in the property from the net sales price (gross sales price less certain expenses of sale). In the case of purchased real estate the adjusted basis is generally the price the taxpayer paid for the property plus the costs any improvements made to the property and less any depreciation allowed or allowable.

However, the rules are different for property acquired either by gift or inheritance. In the case of a property interest that is inherited (which includes for this purpose property that passes by operation of law on the death of the owner, like property held as joint tenants with a right of survivorship) the person receiving that property gets a basis in the property equal to the fair market value (FMV) of that interest on the day the decedent died (or, in rare cases, the date six months after the date of death). Because that FMV is generally going to be higher than the decedent's adjusted basis in the property right before death the adjustment to basis that occurs when property is inherited/passed at death is generally known in the tax community as a "step up" in basis, i.e. the basis is stepped up from the previous adjusted basis to FMV.

Property held as community property has the unique potential to step up not just the basis of the decedent spouse's interest in the property, but also the surviving spouse's interest in the property. That is what the OP is seeking here.

 

[HMR2]

I'm not sure what "step-up basis" means, but California law states that real property purchased by spouses and titled as joint tenants is treated as community property.

Of course, since your wife's been dead for 15 years, it's a moot point. After she died, did you record an affidavit of death of joint tenant or affidavit of surviving spouse succeeding to title to community property"? If you're selling the property, you'll have to do that before you can transfer title. You can't go back in time and change the nominal joint tenancy to community property.



I'm not entirely sure what this question means, but I believe my statements above answer it.

No, I haven't recorded her death with the county but I'm aware that I need to do so before selling. I never even thought about selling until recently. Interesting comment that you make about " affidavit of death of joint tenant or affidavit of surviving spouse succeeding to title to community property ". When I do report her death will I be given that choice ? It sounds like you agree with ' Taxing Matters ' that in California our house would be community property no matter what the title on the deed is ( Joint tenancy ).