Community Property with Right of Survivorship

Effective July 1, 2001, California Civil Code 682.1 will allow a new type of property ownership: Community Property with Right of Survivorship.

The major benefit of holding title as Community Property has been a "double step-up in basis" at the death of a spouse. The major difficulty of Community Property is transfer of full ownership to the surviving spouse when the first spouse dies.

Many married couples hold title to property as Joint Tenants because they do not understand how the step-up in basis works.

Marc and Regina bought a home in 1989. 5 years later they moved out, converting it into a rental. Marc manages the property; Regina hates dealing with it. Many years later the rental property has been depreciated down to very little. More importantly, the value has risen to unbelievable levels.

Marc and Regina bought the property for $100,000, and depreciated it down so the basis is $40,000. It sells for $300,000 (after commission and costs of sale).

The story has 3 possible endings depending on when it is sold and how title was held.

1. The Nightmare
   Marc gets sick; while he is on his deathbed Regina sells it before Marc dies. The profit, $300,000 - $40,000 = $260,000 is taxable.

2. The Happy Ending
   Marc dies; Regina sells it even before the body is cold. Believe it or not, the amount of taxable profit depends on how title was held!

   Joint Tenants: The basis in inherited property is stepped-up to the date of death value. Regina "inherited" ½ from Marc; she already owned her half.

   Regina's basis was $20,000 (½ of $40,000). It stays the same. She already owned it and did not inherit it.
   Marc's ½ (now owned by Regina) is stepped-up to $150,000.
   Regina's basis is now $170,000.
   

   When she sells for $300,000, only $130,000 is taxable.

3. The Happiest Ending
   Community Property: Federal tax law states that the basis of 100% of Community Property is stepped-up to the date of death value.

   Regina's basis is now $300,000.

   When she sells for $300,000, nothing is taxable.

For simplicity I have assumed that Regina will sells instantly on Marc's death. Alternatively, she may hold the property as a rental and enjoy the greater depreciation that applies after the step-up in basis.

You have to sign it on or after 7/1/01.

I have posted a blank form , and a filled-in sample. It should be completed (with the legal description attached as Exhibit A), signed, notarized, and delivered or mailed to the County Recorder's Office.

A PCOR (Preliminary Change of Ownership Report) must accompany the Deed to the local Recorder's Office.  Check Box A to report that this Deed is a spousal transfer, exempt from property tax re-assessment as an exempt transfer under Proposition 13. 

If I cannot record the Deed in person, I can mail it made payable to the County Recorder with a blank check marked "NOT TO EXCEED $25."  Also bring / mail an extra copy of the Deed; they will stamp the copy and give it back to you / mail it with your SASE.  Mailing addresses for many counties' Recorder's Offices.

 You can get the PCOR on line (although it says Sacramento County, it may be used anywhere in California), OR send a SASE to 927 Laguna Circle, Foster City, CA 94404.  Better yet: get it free from your local County Tax Assessor's office.  Fill in the top Section, check Box A (husband wife transfer) and skip to the bottom of page 2 to sign and date.

 A Living Trust is a better tool than the Community Property with Right of Survivorship.

See Comparison Chart

For more information about Community Property, click here.

LIVING TRUST

Return to Estate Planning Directory Return to Real Estate Directory