Community property with right of survivorship, explained

No one wants to think about losing people close to them, but it’s important to have a plan in place for what should happen to your and your partner’s assets, especially a home. For those looking to both fully share and leave their assets to their spouse, community property with right of survivorship may be a good option for you. Let’s take a look at how this method of sharing a home title works.

What is community property with right of survivorship?

Community property with right of survivorship is a legal agreement that allows two spouses or domestic partners to equally share assets through marriage as well as pass on assets to the other spouse upon death without going through probate.

In states that recognize community property, this method of holding and transferring title may be a better option than something like joint tenancy, which we’ll get into later.

What’s the difference between community property and equitable distribution states?

To fully understand how community property with right of survivorship works – and how it differs from equitable distribution – we’ll need to break down what exactly community property is in the first place.

Community property

Community property is a state-level legal distinction that determines ownership of a married couple’s assets. Community property is also sometimes called marital property, and it basically means that whatever your spouse owns asset-wise (real property, income, etc.) you own as well. Think of it as splitting all the important stuff 50/50.

Community property isn’t available to couples everywhere in the United States; it only exists in the nine states that have community property laws, which are:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

If you and a spouse decide to share your assets in this way, it will impact not only the way the assets will be inherited should one of you pass away, but also who gets what in the event of a divorce.

Since community property is shared 50/50 by spouses, these assets will be split equally between the two parties in the divorce. But what happens if you don’t live in a community property state? That’s where equitable distribution comes into play.

Equitable distribution

All states that don’t do community property usually instead use a legal distinction known as equitable distribution when it comes to splitting up assets between two married parties.

Under equitable distribution, all assets and income are divided fairly between the two parties, but not equally – not everything is split 50/50 in this case. Keep in mind that this court-decided division of assets only happens if a divorcing couple cannot come to an agreement on how to split up assets themselves.

In equitable distribution states, couples that own homes together are usually joint tenants. This means that, should both pass away, their share of an asset (a home in this case) passes to their designated heir. The same cannot be done in community property states. Under community property, one spouse’s share of an asset must pass to the other spouse upon their death – they can’t leave it to any other heir.

What is the right of survivorship in real estate?

Now that you understand what community property is, it’s time to tackle the second part of this method of taking title: right of survivorship.

The right of survivorship means that if two parties jointly own a property that has a right of survivorship, when one of them passes away, their share of the property goes directly to the other owner – no matter what the deceased party might have included in their will.

Right of survivorship protects both parties by assuring that if one of them passes, the other will be able to stay in the property and the other share of the asset cannot be left to someone else.

Community property vs. community property with right of survivorship

What makes community property different from community property with right of survivorship? Under community property, any assets acquired during a marriage are jointly owned between spouses. But any assets acquired by one partner prior to the marriage still belongs to them alone. This means that if the asset-owning partner passed away, the asset would not automatically be inherited by their surviving partner unless specifically stated in a will.

This can become a problem if one partner passes without a will or if they leave their half of a property to someone other than their surviving partner.

To prevent things like this from happening, as well as to avoid probate, couples can instead claim title as community property with right of survivorship. The right of survivorship ensures that when one partner passes on, their half of a shared community property goes directly to the other partner – and to no one else.

Let’s take a closer look at the differences between community property and community property with right of survivorship with examples of each.

An Example Of Community Property

Max and Casey are married and live in a house together in a community property state. Max owned the house before they married Casey – so even though they both live in the house, it’s not considered their community property. When Max passes, the title of the house will not transfer directly to Casey. If Max doesn’t name Casey in their will, Casey will have to make an ownership claim against the house as a surviving spouse in the probate process if they want to stay in the home. Now let’s look at an example of community property with right of survivorship.

An Example Of Community Property With Right Of Survivorship

Let’s say Max and Casey make sure that they have a right of survivorship. If Max passes away, their share of the property goes directly to Casey. This makes Casey the sole and full owner of the house without having to go through probate.

Joint tenancy vs. community property with right of survivorship

If you remember joint tenancy from earlier, you may be wondering how it’s any different from community property. In many ways, these two manners of holding title are actually very similar.

Community property with rights of survivorship actually just essentially combines joint tenancy and community property into one form of holding title. Let’s take a closer look at the distinctions between these two.

• Community property with right of survivorship: A legal designation created by the California legislature in 2001, the community property with rights of survivorship was invented for the purpose of combining the tax benefits of community property with the property-owning protections offered by joint tenancy.
• Joint tenancy: The holding of a property by two or more parties that guarantees the share of a party that has passed on is turned over to the other(s) without requiring the probate process is known as joint tenancy.

By adding the survivorship rights of joint tenancy to community property, which comes with some surprising tax benefits, spouses can get the best of both worlds and ensure their share of a home is legally protected.

How does a right of survivorship work with a will?

What happens if a couple has a right of survivorship, but the deceased spouse left their half of the house to someone other than their surviving spouse in their will?

In an example we gave above, Max and Casey shared a house that was community property with right of survivorship. For this example, let’s say Max states in their will that they want to leave their half of the house to their cousin, Jordan, instead of their spouse Casey. Does Jordan get that share?

It still goes to Casey as originally agreed. The right of survivorship is considered a very powerful legal right – it can actually override inheritance claims in many cases. Regardless of what’s added to a will, the right of survivorship will usually make sure that the surviving spouse inherits the other half of the property’s ownership.

Are there tax benefits for surviving spouses in community property states?

We mentioned earlier that community property with right of survivorship was initially created to combine joint tenancy’s perks with the tax benefits of community property. Let’s take a look at what exactly those tax benefits are, now.

Depreciation

When you sell a property, the income or profit you make from selling that home is considered a capital gain and is therefore taxed. The amount that’s taxable is based on your home’s depreciated value or “basis.” While homes typically appreciate in value over the years, the amount you can be taxed can decrease at the same time thanks to depreciation allowances.

You can actually take a tax deduction for this structural depreciation of your home. This deduction, your tax basis, decreases the taxable value of your home.

An Example Of Depreciation

So let’s say you bought your home for $125,000. Let’s also say your current basis, based on depreciation, is $40,000. You sell your home for $350,000. Once we subtract the basis from the sale price, we get the amount that will be taxable.

$350,000 (sale price) - $40,000 (basis) = $310,000 (taxable amount)

Double step-up basis

Another thing that makes community property a huge tax benefit is that it has something called the “double step-up” basis. A regular (not double) step up basis is something that comes along with joint tenancy – it means that if one spouse passes, their basis (based on depreciation) “steps up” to the current value of the home at the time of their death.

With a step-up basis, a significantly smaller portion of your home’s sale will be taxed if you choose to sell the home after the death of a spouse. This amount is further improved by the double-step up basis, which is a benefit of community property. With a double step-up in basis, when a spouse passes, both of your shares of the basis “step up” to the home’s current value.

An Example Of Double Step-Up Basis

If your home is sold for $350,000 and it was community property, your share of the basis steps up to $175,000 and so does theirs – which comes to a total of $350,000, meaning nothing is taxable.

$350,000 (sale price) - $350,000 (new basis) = $0 (taxable amount)

The bottom line: Rights of survivorship keep surviving spouses in the marital home

Community property with right of survivorship ensures that surviving spouses will keep their partner’s share of the home they own jointly upon the death of their spouse. This can be a good option for married couples interested in sharing the title of their home and ensuring through estate planning that their assets will have a place to go if they should pass away.

Keep in mind, however, that community property with right of survivorship is only an option in community property states.

For more information about sharing title and estate planning, check out our guide to tenancy in common.