How is the taxable profit from selling a property affected by holding title as Community Property, Joint Tenancy or Community Property with Right to Survivorship? Here’s an example:
In 1986, Carl and Sandra bought their home for $120,000. Four years later, they moved out and began renting the property. Over the years, the property has depreciated to a basis of $42,000 while the
value has risen significantly. If it sells for $310,000 (after commission and costs of sale), the story can end three different ways, depending on when it sells, and how the title is held.
Carl falls terminally ill, and Sandra sells the property during this time. The profit, $310,000 -$42,000 (basis) = $268,000, is taxable.
Carl passes away, and Sandra sells the property right away. The amount of taxable profit depends on how the title was held.
If the title is held as joint tenants, the basis is adjusted to the date of death value. This applies to the half of the property Sandra inherited after Carl’s passing. The other half that she already owned (valued at $21,000, half of $42,000) will stay the same. Carl’s half is adjusted to $155,000, and is now owned by Sandra.
Sandra’s new basis (her $21K + Carl’s $155k) is now $176,000. When she sells for $310,000, only $134,000, the difference between the two, is taxable.
Under Joint Tenancy, the property will automatically pass to Sandra, bypassing probate, thus avoiding the delay and expense of that process. Only the deceased spouse’s one-half interest obtains an adjusted tax basis under Joint Tenancy, which is equal to one-half the fair market value of the property at the time of death.
Have a good one and let me know if you need anything.