Community Property: Estate and Income Tax Issues

Description

Currently, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska's community property status is elective. Community property states treat property as if each party owns a one-half interest. There are profound differences in the treatment of community property for estate and income tax purposes compared with other ownership structures.

The date of acquisition determines the ownership structure of community property, which will generally retain its character after a relocation, divorce, or death. In community property states, parties have separate ownership rights in property acquired before marriage, while property acquired during a marriage is jointly owned, with some exceptions. Income tax preparers need to understand when to file separate tax returns since, in community property states, income is split equally between spouses.

A significant benefit of holding community property at death is getting a full basis step-up under 1014 (b)(6). At the death of the first spouse, the second spouse gets to step-up both halves of the property to fair market value. Residents of community property states may want to convert common law property to community property. Tax advisers should consider steps to preserve the benefits of community property ownership until death as well as the non-tax implications of doing so.

Listen as our panel of community property experts guides you through the process of identifying community property, the income and estate tax implications of holding community property, and steps to take to reap the tax benefits of this ownership structure.