Types of Property Ownership – Characteristics and Tax Consequences
Sole ownership is the most basic ownership. A person is the sole owner of property when their name is the only name on the document evidencing ownership. Examples — a certificate of title to an automobile with only one name on the title, a bank or investment account registered in only one name, a real estate deed to a single grantee. When a sole owner dies, the property is an asset of their estate. The ownership is transferred to whoever is named in the decedent’s Will or trust or to whoever inherits the property under the law of intestacy if the owner dies without a Will.
For purposes of estate taxation, the entire value of property solely owned by a decedent is subject to estate tax. For purposes of income taxation and the computation of a capital gain or loss on a post-death sale of the property by the decedent’s estate or by the beneficiaries or heirs, the property gets a new cost basis equal to its estate tax value.
Tenancy-in-common property is co-owned by two (or more) persons without any provision for the surviving owner (or owners) to contractually receive a deceased co-owner’s interest. Examples — deeds, bank accounts, stock certificates, and other documents in the names of two or more persons without rights of survivorship. During the lifetimes of the joint owners, each owner is considered as having an undivided fractional ownership in the property. Upon the death of a co-owner, the fractional interest owned by the decedent is an asset of their estate. The decedent’s fractional ownership is transferred to whoever is named in the decedent’s Will or to whoever inherits the decedent’s property if the co-owner dies without a Will.
Only the decedent’s fractional lifetime share is subject to estate taxation. Therefore, only the decedent’s fractional share receives a new cost basis (equal to its estate tax value) for income tax purposes.
Community property has the same attributes as tenancy-in-common property during lifetime. This form of co-ownership is limited to husbands and wives living or owning property in community property states. During their joint lifetimes, each spouse has an undivided one-half ownership. Upon the death of either spouse, the decedent’s community property half is an asset of the decedent’s estate. The distinguishing feature of community property at death is that the deceased spouse can give their community half to anyone — the surviving spouse has no rights of inheritance in the deceased spouse’s community property half.
For estate taxation, only the decedent’s half is subject to tax. However, because the decedent’s gross taxable estate includes both halves of the community property, both halves (i.e., the entire property) receive a new cost basis for income tax purposes. This concept is unique to community property. Therefore, if a husband and wife own property that has an extremely high market value but an extremely low cost basis, for income tax purposes it is desirable to own the property as community property so the entire property will receive a new cost basis at the death of either spouse.
JOINT TENANCY – WITH RIGHTS OF SURVIVORSHIP:
Property owned by two or more persons as Joint Tenants with Rights of Survivorship contractually requires the ownership of a deceased co-owner’s lifetime interest to go to the surviving co-owner(s). “survivorship” property, etc. As a consequence, their pre-death ownership is not transferred by their Will, their trust, or by intestate succession. Instead, their interest is transferred to the surviving co-owner(s) by contract.
(Husband & Wife)
For estate tax purposes, property owned by a husband and wife as joint tenants with rights of survivorship is subject to being taxed only on one-half of its total value. Accordingly, only the deceased spouse’s half receives a new cost basis for income tax purposes.
For estate tax purposes, property owned non-spouses as joint tenants with rights of survivorship is subject to tax at its full value unless the surviving co-owner(s) can “prove” their monetary contribution to the acquisition of the property.
To the extent the survivor(s) can prove their monetary contribution to the acquisition of the property, the taxable portion of the property in the decedent’s estate will be decreased. However, in most instances it is impossible for the survivor(s) to prove their monetary contribution(s). Therefore, the entire value of the property may be taxed in the decedent’s estate. That portion of the property included in the decedent’s estate for estate tax purposes receives a new cost basis for income tax purposes.
COMMUNITY PROPERTY – WITH RIGHTS OF SURVIVORSHIP:
This form of ownership is a combination of two different types of ownership. This ownership gives a married couple the “best of both worlds” — the post-death ease of transfer associated with joint and survivorship property and a new tax cost basis for both halves of the property associated with community property.
Despite potential problems in having this type of ownership accepted by some brokerage houses, this form of ownership should be ideal for many couples whose combined assets will not cause the imposition of an estate tax at the second death. However, for other couples this form of ownership could result in the imposition of unnecessary estate taxes at the second death. Those couples should hesitate to use this type of registration without consulting a knowledgeable professional to advise them on the estate tax consequences of this type of co-ownership between husband and wife.