Why Community Property is Better Than Joint Tenancy

Under current law, assets held by a Decedent on the date of death for income tax purposes have a cost basis equal to the fair market value on the date of the Decedent's death. For example if a Decedent bought her house in Cerritos in 1968 for $35,000 and when she died it could be sold for $600,000, her beneficiaries would use the $600,000 figure as their purchase cost in determining gain or loss on a subsequent sale. Thus if the property were immediately sold for $600,000, there would be no gain and no income tax liability. If property is owned in joint tenancy, only one half of the property receives this step up in tax basis on the first death. Under this set of facts 50% of the property would have a cost basis of $300,000 and 50% of the property would have a cost basis of $17,500. Thus assuming the same $600,000 sale there would be a capital gain of $282,500 that could be subject to tax. However if the property is held as community property then the entire property receives the step up benefit on the first death, and if the same sale took place there would be no capital gain.

When I prepare an estate plan for a married couple I often change the manner of holding title to community property before transferring the property into the trust so this benefit can be attained.