by Phoenix attorney Christopher A. Combs, partner with Combs Law Group, P.C.

Question: You have previously written in your column that a husband and a wife owning their home as Community Property with Right of Survivorship (” CPWROS”) is superior for tax purposes, compared to Joint Tenants with Right of Survivorship (” JTWROS”). Our Tempe home that we bought as JTWROS in 1974 is now paid off. If one of us dies, the other one will probably live in the home until they die. In light of the appreciation in our home since 1974, there may be significant tax payments to the I.R.S. Could you tell us how to change the title to our home to this new designation of CPWROS? How much will this cost? Is this a project that we can do ourselves? I am sure that many readers would like to know the answers to these questions.

Answer: Ownership of a principal residence or any other real property by a husband and wife as CPWROS has a tax advantage over ownership as JTWROS. This tax advantage is that, upon the sale of the real property by the surviving spouse after the death of the first spouse, there is a ” step-up” in basis of the real property of 100% rather than 50%. In light of this tax advantage, I have recommended in the past that a husband and wife transfer the title to real property other than their principal residence from JTWROS to CPWROS. The reason that I have not recommended such transfer for a principal residence, however, is because there is a time and expense in such transfer, a possibility of a mistake, and the $500,000 capital gains exemption for married taxpayers on the sale of a principal residence normally did not result in any tax liability. In light of the major appreciation in the value of the principal residence of most taxpayers in Arizona over the course of the past few years, however, I now generally recommend the transfer of a principal residence from JTWROS to CPWROS, just like other real property. The reason is that, although the $500,000 capital gains exemption for married taxpayers is available to a surviving spouse, the sale of the principal residence by a surviving spouse must occur in the year of the death of the first spouse, which may not happen if the first spouse dies in the last few months of the year, or if as in your case, the surviving spouse does not want to sell the principal residence. Therefore, the capital gains exemption could only be $250,000, not $500,000. If there is only a 50% JTWROS ” step-up” in basis, the result is that there could be significant capital gain taxes owed, which would not be owed if the principal residence had been owned as CPWROS (which would entitle the surviving spouse to a 100% ” step-up” in basis). If a husband and wife want to transfer title to their home from JTWROS to CPWROS, they should contact an attorney or a title company, preferably the title company that insured the title to the principal residence at the time of purchase.

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