Using Joint Tenancy with Real Property as a Probate Avoidance Device, Part 2

Although, joint tenancy will avoid probate, holding property as joint tenants may also have adverse and unexpected consequences. First, a little primer on basis to understand what is meant when we speak about your basis in property.

Generally, your basis in property is what you paid for it when you acquired the property. For purposes of this discussion and to keep things simple, we will not address the adjusted basis which is determined when you consider gain or loss such as capital improvements or depreciation, respectively, to the property.

If you paid $100,000.00 for real property, your basis in that property would be $100,000.00. If you later sold it for $250,000.00, you would realize a gain of $150,000 that, ignoring any exclusions or exemptions that may be available, would be subject to taxation. Similarly, If someone gifted you that same property during their lifetime, your basis in the property would be the same as the person gifting it to you. If they paid $100,000.00 for the property and gave it to you when it’s fair market value was $250,000.00, your basis would be $100,000.00 and if you sold it for $250,000.00, you would have a taxable gain of $150,000.00. Again, for demonstration purposes we are not taking into account any state or federal exemptions or exclusions available such as those under IRC section 121.

Let’s say someone paid $100,000.00 for real property and when they died, the fair market value of the property was $250,000.00. Further, let’s say that person named you as the beneficiary of that property in their Will, Trust or you received it by intestate succession. Your basis in the property would be the fair market value at the time of the decedent’s death. In other words, you would benefit from a “step up” in basis to $250,000.00. This means if you turned around and sold the property for $250,000.00 there would be no gain that you would be responsible to pay tax on.

In short, if you inherit property from a decedent, your basis would be the fair market value of the property at the time of the decedent’s death.

If you hold property with another person as joint tenants, only 1/2 of the property, the decedent’s 1/2, gets a step up in basis at the death of one of the two joint tenants unless the surviving joint tenant can prove the decedent contributed most, if not all of the purchase price.

This is of particular importance if you are married. If you and your spouse have your property in a trust which describes the character of the property as community, or if your vesting document states the property is held as husband and wife as community property, the entire property gets a step up in basis at the death of the first spouse, not just the decedent’s one-half. Conversely, if you and your spouse instead own the property as joint tenants, only 1/2 of the property gets stepped up, regardless of who contributed to the property. Further, the surviving spouse’s basis in the remaining property is 1/2 of the original purchase price. This is easily avoided and makes me wonder why married couples hold title to real estate as joint tenants unless it is for the purpose of having only 1/2 of the property included in the decedent’s gross estate for federal estate tax purposes.

Another item that could become problematic is when you own property and want to add someone to your property as a joint tenant. There are things you may want to consider before doing so. For example, the addition may be deemed a gift to that person which may be subject to gift taxation. Secondly, even though you can add a joint tenant to your property without requiring that person’s signature or approval, you cannot remove the joint tenant from the title without the their signature. If the added joint tenant doesn’t want to be removed from title and doesn’t want to live with or own property with you, they could possibly bring an action in court wherein the court could order the property actually divided into equal parts for each of you (you and the added joint tenant) or order the property sold and distribute the proceeds equally to each of you.

Third, you may want to consider a potential joint tenant’s financial situation prior to adding them to the title as a joint tenant. If the added joint tenant has creditor issues and a creditor successfully brings an action against that person and obtains a judgement, the creditor can file a lien that would attach against the entire property.

Subject to certain ‘original transferor’ and ‘change in ownership’ rules promulgated by the Board of Equalization, there are potential property reassessment tax issues to be consider before adding or removing a joint tenant.

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