Basic Capital Gains Formulae:
Basis = Purchase Price + Capital Improvements
Capital Gain = Fair Market Value – Basis
Taxable Capital Gain = Capital Gain – Personal Exclusion

Step Up in Basis:
Depending on the manner in which a couple holds title to their property, upon the death of a
spouse, the IRS allows a step up in basis to the surviving spouse of the following percent of the
fair market value of the property as of the date of death of the first spouse to die:
a.)        Joint Tenants: a 50% step up in basis.
b.)        Community Property:  a 100% step up in basis.
Philip McCarthy
Attorney at Law
Community Property owners control the
disposition of their estate, and avoid
capital gains taxes.
TAX ADVANTAGE FOR MARRIED COUPLE HOLDING TITLE
TO THEIR HOME AS COMMUNITY PROPERTY INSTEAD OF AS
JOINT TENANTS
LONG ANSWER

Suppose that John and Mary, a married couple purchased a home in 1977, for $100,000.00

In 2007, that property is worth $1,000,000.00.  

Assuming that John and Mary never made any capital improvements (or worse, made capital
improvements but are not able to prove the amount invested in those capital improvements).

IF JOHN AND MARY SELL THEIR HOME THEIR TAXABLE CAPITAL GAIN IS
CALCULATED AS FOLLOWS:











SUPPOSE THAT JOHN DIES AND MARY DECIDES TO SELL THE HOME:

If John and Mary hold title to their property as joint tenants:

The IRS allows a 50% step up in basis to fair market value for the decedent’s half of the home,
while requiring that the surviving spouse maintain their basis as of the date of the death of the
decedent.  

Mary’s taxable capital gain is calculated as follows:











If John and Mary hold title to their property as community property:

The IRS allows a 100% step up in basis to fair market value upon the death of the deceased
spouse.  

Mary’s taxable capital gain is calculated as follows:










Clearly there can be a significant advantage for a surviving spouse in holding title to property as
Community Property rather than in Joint Tenancy.  
Fair Market Value
 $1,000,000.00
Basis
 $   100,000.00
Capital Gain
 $   900,000.00
Personal Exclusion ($250,000.00 x 2)
 $   500,000.00
Taxable Capital Gain  
 $   400,000.00
Minimum Capital Gain Tax ($400,000.00 x .15)
 $     60,000.00
Fair Market Value
 $1,000,000.00
Mary’s Basis: 50% Step up in basis + ½ of original basis
 $   550,000.00
Capital Gain
 $   450,000.00
Personal Exclusion ($250,000.00 x 1)
 $   250,000.00
Taxable Capital Gain  
 $   200,000.00
Minimum Capital Gain Tax ($200,000.00 x .15)
 $     30,000.00
Fair Market Value
 $1,000,000.00
Mary’s Basis: 100% Step up in basis
 $1,000,000.00
Capital Gain
 $              0.00
Personal Exclusion ($250,000.00 x 1)
 $  250,000.00
Taxable Capital Gain
 $             0.00
Maximun Capital Gain Tax ($0.00 x .24)
 $             0.00
For a more detailed analysis of
the tax advantage for a Married Couple
in holding title to their home
as Community Property
Instead of as Joint Tenants
contact me.

For a more detailed analysis of
the tax advantage for a Married Couple
in holding title to their home
as Community Property
Instead of as Joint Tenants
contact me.