Community Property

Community Property

The Community Property If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin) and are married, you have the ability to hold property with your spouse as community property. Certain distinct tax advantages adhere in doing this. Unlike the other forms of joint ownership, community property vesting allows the surviving spouse to receive a full stepped-up basis on both the deceased spouse’s share and on the surviving spouse’s own share.

Example:
David and Mona, who had lived in California for most of their lives, were married for over 30 years. They owned two investment properties: (1) an apartment building with a basis of $100,000 and a fair market value of $500,000 and (2) a large parcel of vacant land with a basis of $10,000 and a fair market value of $610,000. Both
properties had been in the family for many years. David recently passed away, leaving everything to his wife. Mona will receive a full stepped-up basis on both properties to the current fair market value. She can sell both properties and pay no capital gains taxes.

This is a tremendous advantage over other forms of ownership vesting. In the example above, had David and Mona held the properties in joint tenancy, Mona would have received only a partial stepped-up basis and the capital gains taxes due would have been approximately $140,000 between federal and state taxes—a devastating result compared with the zero tax due when the properties were stepped-up as community property.

This type of vesting mistake is usually pointed out and corrected in any basic estate planning. Unfortunately, most people don’t even do basic estate planning. A simple rule here is that community property avoids taxes, joint tenancy avoids probate, but only proper estate planning (usually a living trust) avoids both.