Q I know California is a community-property state; however, can you affirm if there is a full step-up cost basis on a property that remains with the surviving spouse, or if there is a 50 percent step-up? Thanks for your help.

A The nine community-property states are Wisconsin, California, Texas, Arizona, Idaho, Louisiana, Nevada, New Mexico and Washington. Community-property states differ from the common law states in how they treat the real property ownership interests between spouses.

Your question refers to the determination of taxable gain due on the sale of a home if one spouse is deceased. The IRS allows greater ownership interest in a personal residence to pass to the surviving spouse living in a community-property state.

When a personal residence is sold, IRS rules allow a single person to exclude up to $250,000 in profit on the sale. Married couples filing a joint tax return can exclude up to $500,000 in profit on the sale of a personal residence.

In order to qualify for this the property must have been lived in for two out of the past five years. If a spouse dies and the residence is sold in the same year, the $500,000 deferral applies.

Calculation of the profit is determined by taking the net sales proceeds and subtracting the cost of any improvements and the initial purchase price of the property. Profits above this amount would be subject to a 15 percent capital gains tax.

In common-law states, IRS rules determine the adjusted basis for a surviving spouse as one-half of the initial purchase of the property, the cost of improvements made while both spouses were living plus one-half of the fair market value of the property at the time of death of one spouse.

In community-property states, like California, the adjusted basis of the surviving spouse is the entire fair market value of the property. Title to the property must be held in joint tenancy or as community property with the right of survivorship in order for the surviving spouse to qualify for the stepped-up basis. For more information, go to www.irs.gov and review IRS publications 555 Community Property and Publication 551 Basis of Assets.

Source:

http://www.mercurynews.com/mld/mercurynews/classifieds/real_estate/16660330.htm