by Phoenix attorney Christopher A. Combs, partner with Combs Law Group, P.C.
Question: In a recent article you discussed the advantages of changing a deed on a home or other real property from joint tenancy with right of survivorship (” JTWROS”) to community property with right of survivorship (” CPWROS”). Your article did not give details. My inquiries to the I.R.S. and the Arizona Department of Revenue could not explain how changing the deeds would be an advantage. Could you please explain?
Answer: Although I have written several times on this issue, I still get numerous e-mails and letters. The answer to your question is complex, and the easy answer would be simply ” trust me.” For those of you still awake and reading this column, the tax advantage only relates to a sale of a home or other real property by the surviving spouse after the death of the first spouse. After both spouses die there will be a 100% step-up in basis with the result that, as a practical matter, little or no capital gains taxes will be owed if the surviving children sell the home or other real property.
In regard to the tax advantage of a husband and wife owning a home or other real property as CPWROS rather than JTWROS, the following example is illustrative. If a husband and wife bought a home for $60,000 and the husband dies when the home is worth $100,000, the basis of the home will be stepped up to $100,000 if the home is titled as CPWROS. If the home is sold by the surviving spouse, the surviving spouse will pay tax only on the gain between $100,000 and the sale price.
If the home is titled as JTWROS, however, the basis of the home will only be stepped up to $80,000, not $100,000. The reason for this difference is that CPWROS property has a 100% step-up in basis of the interest of both the deceased spouse and the surviving spouse, whereas JTWROS property only has a 100% step-up in basis of the deceased spouses’s one-half interest in the home. In other words, with JTWROS property the deceased spouses’s interest will be stepped up from $30,000 to $50,000, but the surviving spouse’s one-half interest will remain at $30,000, hence, the basis with JTWROS property is only $80,000. If the home is sold by the surviving spouse, the surviving spouse will pay the tax on the gain between $80,000 and the sale price.
Note: Even though there is the $250,000/$500,000 capital gain exemption on the sale of a principal residence, in light of the high appreciation recently in Arizona homes, even the principal residence, like other real property, should be converted from JTWROS to CPWROS by a husband and wife.