Holding Title as Community Property With Right of Survivorship

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Ownership of real property can take a great number of forms. The difficulty is deciding which form of title is right for you, your family, and your business. The facts of your situation will determine how title to property should be held, and properly selecting title form may involve transferring or re-titling property you already own. This article will provide an overview of a new form of title that many people are not yet familiar with: community property with right of survivorship (CPWROS).
Prior to 2001, married couples had to perform a bit of strategic planning when taking title to property. But the California legislature wanted to make it easier for California married couples to take advantage of federal tax benefits. On July 1, 2001, a new form of title was created: community property with right of survivorship. This form of title utilizes the right of survivorship feature while allowing a step-up in basis for community property.

Right of Survivorship

The right of survivorship feature allows the deceased spouse’s property ownership to immediately pass to the surviving spouse upon the first spouse’s death. Generally, no court administration is needed, thus avoiding the time and cost of the probate process.

Step-Up in Basis for Community Property of Both Spouses

A step-up in the basis of property provides an important tax benefit. When you acquire and maintain real property, you invest a certain amount of money in the form of purchase price and improvements. This investment becomes your basis in the property. When you sell or dispose of the property, you recognize a capital gain equal to the current fair market value of the property (i.e., what you sold it for) minus your basis. So if the property has appreciated in value over time, you want your basis to be as close as possible to the fair market value so that you can reduce gain. Reducing gain reduces the taxes that must be paid. A step-up in basis allows you to increase your basis in the property without recognizing any gains, which is a good thing. In a way, stepped-up basis is like the government handing a free investment.
CPWROS provides a large step-up in basis for property owned by a married couple in California. In a joint tenancy, the federal taxation system only allows a step-up in basis for the deceased spouse’s joint tenancy interest. Thus, the surviving spouse receives a stepped-up basis in the property equal to the fair market value of the deceased spouse’s joint tenancy interest.
But with CPWROS, when the first spouse dies and leaves property to the surviving spouse, the surviving spouse receives a step-up in basis both for the deceased spouse’s one-half interest in the community property and for the surviving spouse’s interest in community property. So the surviving spouse acquires a stepped-up basis in all of the community property, not just the deceased spouse’s share.

Conclusion

The goals, finances, and assets of your marriage and your business will all play a role in determining how you should hold title to real property. It is important to note that a properly drafted revocable living trust will provide these and other benefits as well. You should consult with an attorney to help determine whether holding property as community property with right of survivorship is right for your situation.

By The Burton Law Firm

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The Burton Law Firm
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Sacramento, CA 95825
Phone: (916) 570-2740 Fax: (916) 570-2744
www.lawburton.com
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