Basis Comparison
Basis is usually the COST of an asset. Income tax rules may require that basis be adjusted for tax reasons, such as depreciation, or because improvements have been made to the asset.
The basis of an asset is usually "stepped-up" to the date of death value after the death of the owner of that asset. A special rule exists for an asset which has been owned as community property between spouses (not registered domestic partners). After the death of a spouse, both halves of the community property asset (the decedent's half and the survivor's half) receive a "step-up" in basis. Therefore, the entire value of the spouse's community property asset is "stepped-up" to the value as of the date of death of the first spouse to die.
This chart illustrates the importance of the fact that community property receives a new "stepped-up" basis on both halves upon the death of the first spouse. This new "stepped-up" basis is used as the asset's cost, if the property is later sold by the surviving spouse. As a joint tenant the survivor only receives a new "stepped-up" basis on one-half of the property.
A $250,000 exclusion from both federal and California capital gains tax is available effective May 7, 1997 for a single person who has resided in the property for two of the five years preceding a sale or exchange of the property, and provided he or she has not claimed the exclusion within two years of the sale or exchange. This exclusion applies only to a residence and does not apply to income or rental property, stocks or bonds.
A $500,000 exclusion from both federal and California capital gains tax is available effective May 7, 1997 for a married couple after the sale of a residence, subject to the conditions shown in the chart above; exclusion under California tax law also applies to registered domestic partners. Again, this exclusion applies only to a residence which meets the conditions. A surviving spouse will be limited to the $250,000 exclusion described above, so depending on the value of the residence, it may still be very important to convert joint tenancy to community property.
Spouses/partners can create community property by agreement. The agreement between husband and wife or domestic partners will state either:
- Certain described assets are community property; or
- All of the assets are community property.
Since January 1, 1985 California requires that the agreement be in writing, dated and signed by both parties.