ABA Family Legal Guide

Home Ownership

Property Rights and Restrictions

Ownership Options

Which form of ownership is best?

That depends on your circumstances. You or your spouse may want to be able to bequeath half of your house to someone else. For example, if you are in a second marriage with children from the first, you may want to avoid joint tenancy with your spouse because your children could not inherit your interest if you died first. But if you don't want the house included in the estate after one of you dies, joint tenancy might be a good idea. If you are married and have reason to expect creditors to come after your house, you may want the protection offered by a tenancy by the entirety, if available in your state, because property owned by both of you in that form generally isn't subject to a judgment against one spouse.

If you live in a community property state, be aware of two significant tax advantages of holding the house as community property rather than as a joint tenancy. The first advantage has to do with tax on capital gain, which is the difference between the selling price and the house's basis, its cost when you took title (plus allowable adjustments). If you hold the property as community property, when the surviving spouse inherits the whole, the property receives a new tax basis (called a stepped-up basis) that reflects its current value. The practical effect of this is to minimize capital gains taxes if the survivor sells it soon thereafter. Unless your profit on the sale is more than $250,000 this may be irrelevant, because since 1997 tax law has allowed people to exclude the gain from the sale of their primary residence, up to $250,000 per person or $500,000 per couple, as many times as they wish as long as they've lived in the house at least two years of the five years prior to the sale.

Let's say the property was purchased initially for $250,000 and is now worth $600,000. Without the stepped-up basis, you could owe capital gains taxes on $100,000, which is the profit on the house less the surviving spouse's $250,000 exclusion. If you hold the house as community property, then with the stepped-up basis you would owe nothing if it sold for $600,000. But if you hold it as joint tenants, only half an interest changes hands when one spouse dies, which means that only half the property gets a stepped-up basis.

The other tax advantage to community property involves estate taxes. In 2004, subject to reductions in some cases for predeath transfers, every American may bequeath up to $1.5 million without paying federal estate taxes; in 2006, the amount rises to $2 million. (In some states, you still may be liable for state inheritance tax on lower amounts.) If you and your husband do not live in a community property state and hold all your property as joint tenants, none of the jointly-held property will be part of your husband's estate when he dies first. You will then own all the jointly held property free of federal estate taxes, since property can generally pass between husband and wife without tax consequences. But if your estate exceeds the exemption amount at your death, it will be subject to federal estate taxes when you die. If you live in a community property state, however, your husband's one-half share of your community property, along with whatever property he might have had separately, is his estate, and it will not be taxed unless it exceeds the exemption amount. Some or all of it could be passed to your children, tax free. Because of his death, your estate might not grow beyond the exemption amount, and thus would not be subject to tax upon your death.