The Community Property with Rights of Survivorship
Effective January 1, 1995, Arizona law changed. A new option is available for how married couples may hold property. Currently, most couples hold property in Joint Tenancy with Right of Survivorship (JTWROS), to avoid probate, or as Community Property with Rights of Survivorship (CPWROS) to avoid probate and for the tax advantages to avoid Capital Gains Taxes on sale of assets following the death of one spouse. There are only nine CPWROS sates, Arizona is one of these states.
In either case, each spouse holds an undivided half interest in the property unless otherwise specified. While each spouse may dispose of his/her half of community property in a will, in most cases, the surviving spouse becomes owner of the property with rights of survivorship. That is the same result as if the property had been held in joint tenancy with rights of survivorship.
The major difference between comes later when that property is sold by the surviving spouse. Capital Gains Taxes may apply to any appreciation in the value of the property. That appreciation is the difference between the “cost basis” of the property (usually the price paid for the property) and the selling price. With community property, the surviving spouse gets the entire property with a recalculated basis of the property; being the value of the property as of the date of death of the first spouse, not the original purchase price. Therefore, at that point, there is no taxable appreciation and no Capital Gains Taxes. With joint tenancy property, only the deceased spouse’s half is transferable with a new basis. The other half may have tax liability.
Consider a home purchased for $50,000 but worth $200,000 when the first spouse dies. Appreciation is $150,000. Under joint tenancy, $75,000 could be taxable on that date (e.g. $15,000 tax at a 20% tax rate), and under community property there would be no tax liability.
This disparity in treatment was recognized and a new designation became effective with the new year. It is called Community Property with Right of Survivorship. It has the tax advantages of community property and the ease of transfer of joint tenancy (avoidance of probate).
Liability for taxes on property appreciation is not the only consideration in choosing how to hold property. Before changing designations, the impact on your estate must be considered. Some other forms of ownership, such as holding property in a trust, might be more advantageous.
Please do not hesitate to contact us at (520) 797-1400 for a free consultation and additional information, including supporting documentation regarding these matters.