In California, or any other community property state, if you were married while your home mortgage was paid off using one of the spouse’s salaries, it will be considered community property. However, there are good reasons to hold your home as community property rather than as joint tenants. The biggest advantage is receiving a step-up in basis for 100% of all community property assets at the death of the first spouse, rather than only a step up of the 50% held by the decedent if a joint tenant. By holding the property as community property, each spouse is deemed to own the entirety of the property. Therefore, when a spouse dies the entire property receives a step up in basis. If the property were held as joint tenants, the decedent spouse would only own 50% of the property at death, and therefore would only receive a step-up in basis for that 50%.<br />
Let’s say a couple purchased their home with their spouse for $500,000. After 30 years, the home is now worth $5,000,000. At this time the basis in the house is $500,000. If the house was sold the couple would pay capital gains on $4,500,000. Now let’s say one spouse dies. If the property were held as joint tenants, the deceased spouse would own 50% of the property and that 50% would receive a basis step up. Therefore, the deceased spouse’s interest would have a basis of $2,500,000, and the surviving spouse’s interest would still have a basis of $250,000, giving us a total basis in the property of $2,750,000. If the surviving spouse then sold the property, capital gains tax would be paid on $2,250,000. But, if the property is held as community property, the deceased spouse is a deemed owner of the entire property at death, and the entire property receives a step-up in basis to $5,000,000. If the surviving spouse now sells the property, there are no capital gains taxes paid.