After looking over the way in which 14 clients of mine obtained titles to their homes I was barely surprised to observe that their titles are held as joint tenants, meaning it might be held something like John and Mary Smith. These clients were advised by their real estate agent to go with joint tenancy because this way it's simpler to take care of the transfer of the property whenever one spouse dies. Put simply, the surviving joint tenant gets the decedent spouse's interest the instant the spouse passes away. It means that there is no probate, no trust administration or other estate planning arrangement linked to this process. Instead, by operation of law, the interest immediately passes from one spouse to the other immediately upon death. For instance in the case above when John Smith's dies, Mary Smith would simply present an affidavit of death of John Smith to the probate court and John Smith's name would be removed from title, as a result Mary Smith will become the sole owner of the residence.

A California legal professional would be in complete disagreement with the realtor since there are considerable tax benefits for holding property in a form other than joint tenancy. The example below provides an example of the issues involved with holding property in joint tenancy.

John and Mary Smith, a married couple, obtained a house in 1980 for $100,000 in Livermore, CA. They took title as John Smith and Mary Smith as joint tenants. In 2005, John Smith died and thus Mary Smith became sole owner of the residence because she was the surviving joint tenant. In 2005, the value of the home was $1,000,000. Also in 2005, Mary made a decision to sell the home for $1,000,000.

The tax Mary needed to pay for the sale of the home is called capital gains tax. Capital gains tax is added on the gain of an item by subtracting the cost basis of the item when it was initially purchased from the sale cost of the item. Specifically here, the cost basis of an inherited asset is the value on the date of death.

In this instance, Mary acquired the property in 1980 for $100,000. Then in 2005, Mary obtained the other half of the property for $500,000 through the death of her spouse John. Thus, her cost basis would be $550,000, since you could add basis, and when she sold the house for $1,000,000, her gain would be $450,000. In 2009, capital gains tax is roughly 25% (15% federal/9.8% California)

Had the title to the residence been held as "community property" there'd have been substantial tax savings. For example, upon the death of John, Mary would be eligible to obtain a new cost basis for the whole value of the home, $1,000,000, rather than the 50% as in the case of the home being held in joint tenancy. As a result, Mary would not have any capital gains tax due because her inherited cost basis would be $1,000,000 and the selling price was also $1,000,000. In summary, Mary might have saved a lot in capital gains tax had she and Joe titled their property as community property as opposed to joint tenancy.

Last but not least, the principal benefit of joint tenancy, little post-death administration, can be replicated if title is held as "community property with right of survivorship." Even so, the IRS has yet to rule if holding title as community property with right of survivorship allows the surviving spouse to obtain the property with a new cost basis for the entire property, rather than 50%. Regardless, holding marital real estate as "joint tenancy" is not recommended in most scenarios.