by Phoenix attorney Christopher A. Combs, partner with Combs Law Group, P.C.
Question: My husband and I purchased our Tempe home seven years ago as community property with right of survivorship (” CPWROS”). We recently established a living trust, and transferred our Tempe home to ourselves as trustees of the living trust. The home is now worth $600,000, although we purchased the home for only $220,000. My husband is very ill, and I intend to sell the home as soon as he passes away. I know that, if we still own the home as CPWROS, we would have a 100% step-up in basis to $600,000. Do we still have the same 100% step-up in basis to $600,000 now that we own the home in a living trust? Do I have to sell the home in the year of my husband’s death to receive this 100% step-up in basis to $600,000?
Answer: First, the legal ownership of a principal residence or other real property in a living trust is generally community property, unless otherwise designated. Therefore, upon your husband’s death, there should be a 100% step-up in basis of your home to the current value of $600,000, and when you sell your home you will pay tax on the gain between $600,000 and the sale price. Second, there is no requirement that you sell your home within the year of your husband’s death for the 100% step-up in basis. You are thinking of the capital gain exemption on the sale of a principal residence by a surviving spouse. If the sale of the principal residence is in the year of the death of the first spouse and a joint tax return is filed, the capital gain exemption is $500,000. Otherwise it is only $250,000.