“One of the last things most home buyers think about is how to take title to their new house. It’s best to consult a real estate attorney before deciding but, unfortunately, most homeowners don’t do that.” Robert J. Bruss, Los Angeles Times, Picking the Best Way to Hold Title to your Home, January 11, 2014.
In many instances married homeowners are acquiring title to their home as joint tenants. Joint tenancy provides that upon the death of one of the joint owners, the survivor will own the entire property. NRS 132.210. The substantial advantage of joint tenancy is that this type of ownership avoids probate. A death certificate is all a surviving joint tenant needs to take control of a joint asset. However, this type of ownership does not take advantage of other methods which are available and are even more advantageous for the home owners.
Married couples may hold title simply as community property and keep the right to will their separate interests to other people, or they may hold title with the right of survivorship and guarantee that, upon death of one spouse or partner, the property will go to the surviving spouse or partner without any court proceedings needed. Community Property with Rights of Survivorship is a better alternative than joint tenancy for married couple as a result of a “stepped-up basis” that joint tenants generally do not receive, unless they comply with Rev. Rul. 87-98 as described herein. For example, if Jim and Mary Jones purchase a home today for $250,000 as joint tenants, each owner has a basis of $125,000. If Jim passes away in 10 years when the home has appreciated to $350,000, Mary becomes the sole owner of the property. If she decides to sell the property at that time she will pay taxes upon the gain which is calculated as the difference between the sales price and her basis. Mary will receive an increase in basis pertaining to the half received from Jim; however, the basis in her one-half of the property is determined at the time she acquired the property. As a result her basis is $300,000 ($125,000 + $175,000) and she will be taxed upon the $50,000 gain. *It should be noted that ownership of real property as joint tenants in a community property state can receive stepped up basis treatment under certain conditions. The problem is that when real estate is held as joint tenancy, there is a presumption that it was transmuted (converted) to separate property and no step-up in basis would be allowed. However, if the parties clearly indicate in writing that they intended the property not to be transmuted to separate property, the community nature of the property is preserved. The danger with using joint tenancy is that most couples don’t realize a writing is required and the stepped up basis is lost.
When property is owned as community property with rights of survivorship, both halves of the property receive a “stepped up basis”. In other words, Mary’s basis would become the fair market value of the entire parcel at Jim’s death. If she chose to sell the property at that time, there would be no gain and no additional tax burden imposed!
Our next post will address the BEST way for married couples to title their home. For more information, please don’t hesitate to direct your clients to contact our Las Vegas Real Estate Attorneys at (702) 798-4955 for a free consultation.