Community Property Trap of California Real Property Joint Ownership Tip Sheet by Deed and Record

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An owner spouse of real property wants to protect the other spouse with joint ownership. California community property laws will create adverse consequences in the event of divorce as explained in this tip sheet by Deed and Record.

Mark W. Bidwell, Attorney at Law

A spouse owning separate real property in California must weigh the capital gains advantage, spouse protection and the risk of divorce in joint ownership.

Deed and Record explains the hazards of adding a spouse as an owner of real property in California. California is a community property state. Community property states have two distinct types of real property for married couples.

In community property states real property acquired during a marriage is community and each spouse owns one-half. Inherited real property and real property acquired prior to marriage is separate property. Separate property is owned by one spouse.

The main reason to add a spouse as owner is to protect the other spouse in the event of death of the owner spouse. The non-owning spouse is added as either a joint tenant or as owner of "community property with the right of survivorship." Both ownerships avoid probate and protect the surviving spouse.

The risk of joint ownership is in a divorce. Adding a spouse on title to separate property converts the property into community property. In a divorce community property is divided equally between the two spouses.

To complicate matters there is a capital gains tax advantage to community property. Federal estate tax law and California community property law work together for the surviving spouse to receive a full step-up in “basis” on real property. Capital gain tax is computed on the difference between the selling price and the basis of the property.

The best way to protect the other spouse in the event of death while preserving the separate property status is with a trust. The separate real property is transferred into the trust. But the capital gains advantage is lost.

A spouse owning separate real property must weigh the capital gains advantage, spouse protection and the risk of divorce in joint ownership. A trust protects both spouses in divorce and death, but may have a tax disadvantage and does have upfront costs. Adding a spouse on title to separate property converts the property into community property. Such is the complications of owning real property in California.

This tip sheet is provided by Mark W. Bidwell, a licensed California attorney. Mr. Bidwell markets through websites, mainly DeedAndRecord.com. Office is at 4952 Warner Avenue, Suite 235, Huntington Beach, CA 92649. Phone is 714-846-2888.

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Mark Bidwell

Mark W.Bidwell
Kim Nishida
since: 10/2012
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