Dear Liz: Our house was titled “joint tenant with right of survivorship” after my husband inherited the property in 1998. As a same-sex couple, we were not married at the time. However, we legally married in 2013. Will one of us get the step-up in tax basis when the other passes, or do we have to retitle the house some way? We also want to avoid probate. We live in California.
Answer: As you know, California is one of the community property states that allows both halves of a property to get a step-up in tax basis when one spouse dies. This double step-up can be a huge tax saver, since none of the appreciation that happened before the death is taxed. Other community property states include Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In Alaska, spouses can sign an agreement to make specific assets community property.
In contrast, in common law states, only half of the property gets the step-up to a new tax basis when one spouse dies. The other half retains its original tax basis.
Although assets acquired during a marriage are generally considered community property regardless of how they’re titled, in your case the property was acquired before marriage. The current title of joint tenants with right of survivorship would avoid probate, but it will not achieve full step-up in basis when the first spouse dies, said Mark Luscombe, principal analyst for tax research firm Wolters Kluwer.
If our property in California is held in the name of a Trust (to avoid probate), can we also benefit from the double step-up when one spouse dies?
Yes, a living trust wouldn’t interfere with the step up.