Joint Tenancy (Presumption of right of survivorship. Avoids probate.) – Only Decedent’s interest receives stepped up basis.
Ex. Bill and Mary purchased home for $100k. When Bill dies, the home had a fair market value of $1m. Mary receives 100% of the property; however, Bill’s 50% interest has a basis of $500k. Mary’s original 50% has a basis of $50k. If Mary sells the home when Bill dies, there will be capital gains on her 50% (less her $250k exclusion) but minimal or no capital gains on Bill’s 50% interest. There is no property tax reassessment when the property transfers to Mary.
Tenancy in Common (No right of survivorship. May require probate.) – Only Decedent’s interest receives stepped up basis.
Ex. Bill and Mary purchased home for $100k. When Bill dies, the home had a fair market value of $1m. Bill’s 50% is distributed via his estate plan; therefore, Mary may not receive Bill’s 50%. Bill’s interest has a basis of $500k. Mary’s 50% has a basis of $50k. If Mary receives the property and sells the home when Bill dies, there will be capital gains on her 50% (less her $250k exclusion) but minimal or no capital gains on Bill’s 50% interest. If the property transfers to Mary, there is no property tax reassessment.
Community Property (Right of survivorship must be expressed or probate is required; however, surviving spouse will receive 100% interest.) – Both Decedent’s interest and Survivor’s interest receives stepped up basis.
Ex. Bill and Mary purchased home for $100k. When Bill dies, the home had a fair market value of $1m. Mary receives 100% of the property. Both Bill and Mary’s interest (100%) receives a stepped up basis. The basis is $1m. If Mary sells the home when Bill dies, there will be minimal or no capital gains on 100% interest. There is no property tax reassessment when the property transfers to Mary.
