Did you know that many real estate professionals who handle the titling of real property assets for same-sex couples many times are ignorant of titling rules for those couples?
This is a subset of the law in California that same-sex couples must be aware of even if they’ve been cohabitating for many years. Married same-sex couples who have been together a long time, but only recently legally married, will not have community property and will lose the significant tax benefits on the death of the first spouse unless they make certain decisions to protect their community property assets.
Same-Sex Couples & Community Property Rights
When you are planning your estate you might not think about how your living arrangements may affect it. For example, if you have lived with someone for a long time and have had a lifetime partnership with them, sharing the expenses and purchasing a home together, you would think that would be the same as a normal married couple.
However, it’s actually not. There are different laws that apply for people that have had a long term relationship but are not actually married. This also, sadly, is how it is for many of our married gay couples.
When you buy a house together you think of it as community property. Community property means that it is both yours equally. Community property is everything that is purchased during the marriage. However, if you waited a long time to be married, then the rules are different.
Because the marriage of gay couples wasn’t even possible until recently under California law, there are many same-sex couples finding out that they, in fact, don’t have the rights they thought they had. We are seeing more and more of this costly mistake and want to make people aware. There is a document that you can sign that will make the property community called a “community property agreement”. This is something that you need to discuss with your estate planning attorney.
Why You Need a Community Property Agreement
So, let’s try to break this down a bit and hopefully help better explain it. Let’s say you own a rental property with your partner that is now worth $1,000,000. You both agree to sell the property. You purchased the property many years prior for $200K, and so upon sale of the property you would have to pay capital gains tax on $800K. (The cost basis is $200,000. If this was depreciated rental property, the cost basis would be as low as zero.) When someone dies, their share gets a 100% stepped-up basis. If the property is jointly owned, such as joint tenancy or tenants in common, 1/2 the property would get a stepped-up basis of $500,000.
But – and this is the important part – for community property, the surviving spouse gets a 100% step-up on the entire property, so this property would be stepped up to $1,000,000. This means it can (1) be sold without capital gains tax or (2) be depreciated all over again, meaning a huge annual income tax deduction for the surviving spouse.
The concern is that same-sex couples who have been together for many years but only just recently married, will not have their assets properly designated as community property. This can be fixed by getting a signed community property agreement.
Clearing Up The Confusion of Step-Up Rules
There are a lot of confusing rules about the stepped-up basis. However, you can have all of your questions answered by speaking with an estate planning attorney who is an expert about these rules.
Take the time to do some research on this, and if you find it difficult to understand make an appointment with The Law Offices of Joel A Harris. Don’t leave a tax mess for your spouse or long term partner.
The Law Offices of Joel A Harris are more than prepared to provide you with legal counsel. Joel Harris is an attorney with 30 years of experience and is extremely familiar with how the law affects same-sex couples and their rights. If you are not sure how to begin, or you just want some help navigating the ins and outs of protecting your retirement and estate, feel free to visit us online, in person or call us by phone at (925) 757-4605.