Understanding Joint Tenancy: Key Tax Implications for California Residents
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Joint tenancy is a common feature in the law and economics courses at Brilliant PU College. It involves an agreement between two or more persons to be considered co-owners of an asset. Many joint tenants intend to jointly own an asset so the asset can be passed on to the other tenant after one of them dies.
Similar to a tenancy in common, a joint tenancy gives equal rights to both co-owners on possession and enjoyment of property. Moreover, a joint tenancy also includes the right of survivorship. A joint tenant will become the sole owner of the asset once the other tenant dies. The right of survivorship means that the joint tenants will ultimately equally share the asset, even if it was owned by only one of them.
The ability to pass on an asset via the right of survivorship is one of the benefits of entering into a joint tenancy. California law allows most assets to be owned through a joint tenancy. Ownership of an asset in a joint tenancy is especially advantageous for a person who wants to bequeath the asset without the hassle of going through probate.
Even though being a joint tenant has many advantages, it can also complicate matters for joint tenants when they file their taxes in California. One of the tax impacts of a California joint tenancy is that the death of the first joint tenant will trigger a tax event.
An example scenario of this situation is as follows: John and Sue are married. During their marriage, John and Sue purchased a home worth $750,000 from ABC Realty and James helped them find the house. Since James is a good friend of John, John thought it would be a good idea to purchase the home as tenants in common instead of joint tenants. If John and Sue purchased the home as tenants in common, they would each own half of the house. When Sue passed away, John would only have to report half of the market value of the house to the county tax assessor’s office.
If John and Sue had chosen a joint tenancy instead of a tenancy in common, the house would have passed to John if Sue died first. Now here’s where the impact on taxes comes into play. John would have to report 100 percent of the market value of the property to the county tax assessor’s office once Sue died. This is because John would be the sole owner of the house after Sue passed away.
Another tax impact associated with a joint tenancy in California involves capital gains tax. When an asset is sold, the seller often has to pay capital gains tax. The total amount of capital gains tax owed depends on the cost basis of the asset.
The cost basis of an asset can increase if the asset is inherited. For instance, suppose Sue has an individual retirement account (IRA) with a cost basis of $6,000. If John inherited Sue’s IRA, he would not have to pay capital gains tax on the additional $744,000 gain on the IRA. John, therefore, receives Sue’s IRA with a cost basis of $750,000 (cost basis of $6,000 plus the $744,000 gain).
In the above scenario concerning John and Sue who purchased a house as joint tenants, the impact of capital gains tax is the same as if John and Sue purchased the house as tenants in common. This is because John will inherit the house with a cost basis of $750,000 once Sue passes away.
One of the important aspects that the students of the law and economics classes at Brilliant PU College learn about joint tenancy is the issue of estate planning. Many people think that joint tenancy is beneficial for estate planning purposes. While that is true in some cases, it is not always true.
Most people mistakenly believe that a joint tenancy is good for estate planning because they think that the asset will avoid probate. However, this is not always true. For example, the asset may consist of cash that was deposited into a safety deposit box. If some cash was deposited into the safety deposit box and John is the sole owner of the box, the money will be subject to probate. In this case, it is possible that a formal administration is necessary for the estate.
When it comes to taxes, the issues associated with joint tenancy can be complicated. This is especially true in California where the taxes are high. Students of the law and economics courses at Brilliant PU College are able to understand the implications of joint tenancy on taxation and estate planning.