If you’re married and the two of you own your house, is your legal title recorded as “joint tenants” or “community property”? If you bought it recently, odds are good it’s “community property” (and it should also include “with right of survivorship”). However, if it’s an older purchase and the title says “joint tenants,” you could be in for a surprising tax burden after one of you dies.
If the home is held as community property and one of you dies, the IRS says that 100 percent of the home’s tax basis will be readjusted or “stepped up” to the fair market value upon the date of death. You effectively get to pretend the house was purchased at the date-of-death value.
Here’s the flip side: If your home is held in joint tenancy, only half of the original value – the half belonging to the deceased spouse – gets stepped up to the date-of-death valuation.
Ultimately, though, this really only matters under certain conditions—if the surviving spouse plans to stay in the house for at least a couple of years, and if he or she gains less than $500,000 when selling it, then it will be excluded from any capital gains tax and the title issue is moot. Taxes sure are fun, aren’t they!
“Personal Finance Notebook: Couples should check the legal title to their residence” [Sacramento Bee]