Many California married couples own their homes and investment properties as joint tenants. It is simple, and when one spouse dies, the property passes automatically to the survivor. But for highly appreciated real estate, joint tenancy may not produce the best income tax result.
The Basis Difference
Suppose spouses bought a rental property years ago for $500,000, and it is worth $1.5 million when the first spouse dies.
If the property qualifies as community property, IRC §1014(b)(6) generally adjusts the basis of both halves to fair market value. If the survivor sells soon after, there may be little or no taxable gain.
In a typical spousal joint tenancy, only the deceased spouse's half is adjusted. The survivor's half generally keeps its original basis.
Assuming no depreciation:
| Community Property | Joint Tenancy | |
| Original basis | $500,000 | $500,000 |
| Basis after first death | $1,500,000 | $1,000,000 |
| Gain on sale at $1.5M | $0 | $500,000 |
For rental property, the difference can be even larger.
The basis adjustment can also eliminate depreciation-related gain on the portion that is adjusted.
Community Property With Right of Survivorship
California allows spouses to hold title as community property with right of survivorship (CPWROS). It combines the probate-free survivorship of joint tenancy with community property characterization, which supports the full basis adjustment under §1014(b)(6).
Couples with a revocable living trust may not need CPWROS at all. The property can often go directly into the trust, with documents that preserve its community property character.
Either way, documenting that character while both spouses are living can avoid the uncertainty of trying to establish it after a death when the deed says joint tenancy.
Retitling Is More Than Paperwork
Changing title can be a transmutation under California law, with its own legal requirements. It can also shift ownership rights. For example, converting one spouse's separate property into community property can give the other spouse rights they did not previously have.
Extra care is needed when one spouse contributed separate property or owned the property before marriage, or in second marriages and blended families where the spouses have different intended beneficiaries.
Other Considerations
Property tax. California's interspousal exclusion means changing from joint tenancy to CPWROS generally does not trigger property tax reassessment. Later transfers to children are different: under Proposition 19, rentals and second homes generally no longer qualify for the parent-child exclusion.
Principal residence. A surviving spouse who sells within two years may qualify to exclude up to $500,000 of gain under IRC §121, if the requirements are met. That can reduce the tax difference, but the basis adjustment can remain valuable for highly appreciated homes.
Special situations. Different rules can apply to joint tenancies created before 1977 and when a spouse is not a U.S. citizen. And if property has declined in value, its basis can be adjusted down rather than up.
The Takeaway
Joint tenancy offers convenient survivorship, but it should not automatically be assumed to provide the best tax result.
Couples with appreciated real estate should review the property's title, character, tax basis and estate plan, and retitle only after considering the full picture.
KPLAN Law Group, APC
Estate Planning | Business & Transactions | Cross-Border Planning
This publication is for general informational purposes only and is not legal or tax advice. Results depend on the particular facts and circumstances. Consult your legal and tax advisors before changing title to real property.