By Rachel Puryear, Attorney and Founder of Legal Document Helpers
Buying a home is an exciting milestone for any couple! One of the little details you might not think about until it’s time to sign papers, though, is how to title your home. The papers you sign will include a form where you select how to vest and title your home.
Here’s how I would title a home with my spouse: Community property with right of survivorship.
Why that one?
First of all, what does community property mean? In CA, married couples jointly own income and property that is earned during their marriage; as well as pretty much any other income or property that was not a gift or inheritance, or property that one spouse already owned before the marriage (those exceptions are called separate property). So, if a couple buys a house together, with money they saved together, and pays on the mortgage with income earned during the marriage; it is community property. Where it would not be community property – or at least not entirely – is where one spouse paid for all or some of the house with separate property (property they had before marrying, or obtained via gift or inheritance).
So, let’s move forward assuming that the spouses agree that the house is at least mostly community property, which in most cases it will be. (If that’s not the case, you may want to title the house otherwise.)
With “community property with right of survivorship” titling, there is a capital gains tax advantage whereby when one spouse passes away, the capital gains basis is stepped up to the date of the death. There is already a capital gains exclusion of $250,000.00 per person, so $500,000.00 for a married couple.
Here are some examples:
Maria and Liz get married. They buy a home for $400,000.00, which is community property because they bought it with money they had earned and saved together. Years later, they are both still living and married, and they sell the house for $1,000.000.00. The capital gains basis is still $400,000.00, regardless of titling. They may each apply an exclusion of $250,000.00. So they pay capital gains tax on $100,000.00. ($1,000,000.00 sales price minus $400,000.00 basis as the purchase price, minus $500,000.00 for each of their exclusions = $100,000.00).
Maria and Liz get married. They buy a home for $400,000.00, and title it as “community property with right of survivorship”. Many years later, Liz passes away. At the time that Liz dies, the value of the home is $1.2 million. Maria decides a few years later to sell the home, and she sells it at a price of $1.5 million. Maria’s capital gains basis is not $400,000.00, it is $1.2 million, because that was the value when Liz passed away. Maria can apply an exclusion of $250,000.00. Therefore, Maria only pays a capital gains tax on $50,000.00 ($1.5 million sales price minus $1.2 million stepped-up basis, minus $250,000.00 exclusion = $50,000.00).
Of course, every couple and every person’s situation is different, so it is still recommended to get legal advice specific to you before making major legal decisions. There are circumstances where a different form of titling could be better. However, “community property with right of survivorship” titling tends to likely be the most advantageous for most married couples who intend to own a home together in California.