If you sell a home that you received through right of survivorship, your capital gain or loss for federal income tax purposes depends on the selling price and your basis in the home. Your basis will depend on whether you held an interest in the home through joint tenancy or as community property. And if your interest is through joint tenancy, it will depend on how you acquired the interest. You may have paid part of the purchase price, acquired the interest as a gift, or through inheritance.
If you hold the home in joint tenancy and you paid part of the original purchase price your basis in your share of the home would be your cost. Then when you acquire full ownership through right of survivorship, you would have a dual basis – your original basis in your share of ownership, plus the fair market value of the other co-owner’s share of ownership at the time of death.
For example, if you and a co-owner purchased a home for a total of $100,000, each paying half the purchase price, and you acquired complete ownership through right of survivorship when the home had a fair market value of $150,000, your basis would be $125,000: your original share of the purchase price ($50,000) plus half the fair market value at the time of your co-owner’s death ($75,000).
If you received your interest in the home as a gift, your basis in your share of the home would generally be the adjusted basis for the person who gave you the gift. Then when you receive the home through right of survivorship your dual basis would be the adjusted basis from the donor for your share, plus the fair market value of the other co-owner’s share of ownership at the time of death.
If you inherited a share of ownership in a home held in joint tenancy, your basis in your share would be the fair market value at the time of the donor’s death. When you receive full ownership through right of survivorship your basis in the other co-owner’s share would be the fair market value at that time. So your dual basis would include the fair market value for the share of joint ownership you originally inherited, plus the fair market value of the other co-owner’s share of ownership at the time of death.
According to the IRS, in community property states the husband and wife are each considered to own half the community property. When either spouse dies, the basis for the surviving spouse is the fair market value of the property at that time. This applies to both spouse’s half of ownership of the property, so the surviving spouse’s basis is 100% of the fair market value and not half the original basis plus half the fair market value on the date of the other spouse’s death. This is provided that at least half the value of the community property is included in the decedent’s estate, whether or not an estate tax return is filed.
If you make any capital improvements on the home, the cost would be added to the basis. And there may be other adjustments that reduce the basis. For example, if you rented out the home you would reduce the basis for the depreciation during the period that the home was rented.
If you sell the home you acquired through right of survivorship and have a capital gain, you can exclude the gain up to the limits ($250,000 or $500,000 if you are married filing jointly) if you meet the requirements. During the 5-year period prior to the sale you must have owned the home for at least two years and you must have lived in the home as your main home for at least two years.
Community Property With Right Of Survivorship, California Association of REALTORS®
Publication 551, Basis of Assets, IRS