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Q.Why is it bad for married people to own property in Joint Tenancy?
A.In community property states ((Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington), Joint tenancy is not recommended for married couples who own assets that can substantially increase in value (like a home) because of the loss of what is referred to as a "stepped up basis." When property is held in joint tenancy, the surviving joint tenant will not receive a "step-up" in cost basis to fair market value when the other joint tenant passes away. Let's explain with an example.
In the community property states, the law provides for a full step up in cost basis for property owned by husband and wife so no capital gains tax is due when a spouse passes away. If property, say a home, was purchased for $100,000, but on the day the deceased spouse passed away was worth $600,000, there would normally be a $300,000 taxable event. However, if held as community property there is no taxable event.
The federal tax reform bill passed in 1997 allows the surviving spouse a capital gains exclusion of $250,000, but for some California residents, even this amount may not be enough to prevent payment of capital gains tax when a residence is sold.
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