Owning Real Estate as a Married Couple

Holding Title to Real Estate in California as a Married Couple

When it comes to holding title to real estate in California as a married couple, there are a couple of primary considerations. The two most important of these for most people are taxes and probate. Below is a cursory coverage of these two issues.

Estate Tax Consequences

The way in which you hold title as a married couple has serious capital gains tax consequences upon the death of the first spouse. Taking title as joint-tenants can result in a substantial taxable capital gain that would not exist if the property was held as community property or in a trust. With title as community property or in a trust, when the first spouse passes away, the capital gains “basis” is stepped up to current market value when the property passes to the surviving spouse. If the surviving spouse sells the next day, their capital gain is zero.

With joint-tenancy, only the deceased spouse’s one half interest is “stepped up” to current value. The surviving spouse’s tax basis in the other half remains the same. This is a very serious negative consequence of holding title as joint-tenants.

The California Probate Process

In California, any estate with a gross value of more than one hundred and fifty thousand dollars that is not passing between spouses must go through a painfully time consuming and expensive process called probate. However, assets held in a revocable living trust are not counted as part of the gross estate for probate purposes. For this reason, most California residents who want to avoid probate should own their home in a revocable living trust.

Methods of Owning Real Estate as a Married Couple in California

These are the most popular ways to hold title as a married couple in California.

Community Property

• Pros:
  • Fully stepped up tax basis at death of first spouse
  • No setup cost
• Cons:
  • House is subject to probate if both spouses pass away concurrently

Joint-tenancy

• Pros:
  • No setup cost
• Cons:
  • Only ½ of the home value receives a stepped up basis at the death of the first spouse
  • House is subject to probate if both spouses pass away concurrently

Co-Trustees of a Jointly Settled Revocable Trust

• Pros:
  • House is not subject to probate even if both spouses pass away concurrently
  • Fully stepped up basis at death of first spouse
  • Smooth management transition if spouses lose capacity

• Cons:
  • Setup cost ($1,800 to $2,500)