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Community Property: Cost Basis Implications

Community Property: Cost Basis Implications

Understand The Treatment Of Community Property In Texas

 

How does Community Property work? Assets titled as Community Property (Or trusts that qualify) save you money on taxes by adjusting or “stepping up” the basis of the entire property after the death of one member of a couple. When you and your spouse invest in property jointly — be it real estate, stocks, or other assets — it becomes what is called “Community Property” if you live within any of the nine applicable states.

Federal tax code section 1014(b)(6) provides that community property assets step up 100 percent in basis at the death of one spouse (even though the other spouse survives). Example: Stock worth $100 at date of death with a cost basis of $20 steps up to $100 basis upon date of death. This means that the $80 built-in capital gain that would be taxed upon the sale of the asset disappears.

Community Property differs from “common law” states (non-community property states) where step up occurs only to the extent of the decedent’s ownership (one-half of property held in “joint tenancy” or tenancy-by-the-entirety). Example: Stock worth $100 at date of death with basis of $20 has a new basis of $60 at date of death, which is $50 decedent’s share (one-half of $100) plus $10 survivor’s share (one-half of $20).

Obviously, the tax advantage associated with Community Property step-up in basis can be significant for the surviving spouse or other heirs.

 

 

Getting to know your basic Community Property terminology

 

Community property: Assets a married couple acquires by joint effort during marriage if they live in one of the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Basis: What you paid for an asset. The value that is used to determine gain or loss for income tax purposes. A higher basis means less capital gains tax.

Stepped-up basis: Assets are given a new basis when transferred by inheritance (through a will or trust) and are revalued as of the date of the owner’s death. The new basis is called a stepped-up basis. A stepped-up basis can save a considerable amount of capital gains tax when an asset is later sold by the new owner.

Double step-up: Because of a tax loophole, community property receives a basis adjustment step-up on the entire property when either one of the spouses dies. Therefore, if a surviving spouse sells community property after the death of their spouse, the capital gain is based on the increase in value from the first spouse’s death (where the basis got adjusted on both spouses’ shares) to the value at the date of the sale. This allows the survivor to save money on capital gains tax liability.

 

Need Some Help?

If you’d like some help from a CPA or CERTIFIED FINANCIAL PLANNER (CFP®) advisor regarding this strategy and how it applies to you, the Rhame & Gorrell Wealth Management team is here to help.

Our experienced Wealth Managers can help you review your financial and tax situation inside the 401(k) and come up with a custom tax optimization strategy going forward.

Feel free to contact us at (832) 789-1100, [email protected], or click the button below to ask a question or schedule your complimentary in-person or virtual strategy session today.

 

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IMPORTANT DISCLOSURES:

Rhame & Gorrell Wealth Management, LLC (“RGWM”) is an SEC registered investment adviser with its principal place of business in the State of Texas. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that RGWM has attained a certain level of skill, training, or ability.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own CPA or tax professional before engaging in any transaction.  The effectiveness of any of the strategies described will depend on your individual situation and should not be construed as personalized investment advice.

For additional information about RGWM, including fees and services, send for our Firm Disclosure Brochures as set forth on Form ADV Part 2A and Part 3 by contacting the Firm directly. You can also access our Firm Brochures at www.adviserinfo.sec.gov. Please read the disclosure brochures carefully before you invest or send money.

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