Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Estate and tax planning for your home

There are numerous ways to own real estate and these ownership arrangements have significant legal and tax ramifications. Let’s take a look at some of the most popular arrangements and what might happen after death. First, let’s assume that John and Jane Smith are married, and that Joe Nelson is John’s business partner. John died in 2020 and in each situation the property was purchased for $200,000 and was worth $500,000 at date of death.

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Individual Ownership – Like the name implies, only one person’s name is on the deed.  Example: “John Smith” is on the deed.

  • Generally, a probate (court) proceeding must be opened to transfer or sell the property.
  • The property gets a step up in basis to the fair market value on date of death, $500,000.

Tenancy-In-Common Ownership– More than one person’s name is on the deed and when one person dies, his or her estate gets the deceased person’s interest in the property Example: “John Smith and Joe Nelson, as tenants-in-common” is on the deed (assume 50% interest each).

  • John’s estate and Joe will co-own the property after John’s death.
  • Generally, a probate (court) proceeding must be opened to transfer or sell John’s interest in the property.
  • The property has a basis of $350,000 – Joe’s basis is $100,000 (1/2 of the original purchase price) and the estate’s basis is $250,000 (1/2 of the fair market value on date of death)

Joint Tenancy – More than one person’s name is on the deed and when the first person dies, his or her interest goes to the surviving person. Example: “John Smith and Joe Nelson, as joint tenants with right of survivorship” is on the deed (assume 50% interest each).

  • Joe owns the property after John’s death.
  • Joe can usually take ownership, without opening a probate, by submitting an affidavit (sworn statement) to the County Recorder and providing a death certificate.
  • Joe’s basis is $350,000.

Community Property with Right of Survivorship – Like a joint tenancy, but the spouse is the co-owner. Example: “John and Jane Smith, as community property with right of survivorship” is on the deed.

  • Jane owns the property after John’s death.
  • Jane can usually take ownership, without opening a probate, by submitting an affidavit to the County Recorder and providing a death certificate.
  • The property gets a full step up in basis to $500,000.

In Trust – A person’s living or revocable trust can own property. Example: “John and Jane Smith Living Trust” is on the deed.

  • The trust continues to own the property after death and the trustee follows the instructions in the trust agreement.
  • The trust retains ownership and does not need to open a probate to transfer or sell the property. The trustee may need to submit paperwork to the County Recorder showing that they have authority to take actions on the trust’s behalf.
  • Whether the property gets a full step up will be dependent on a number of factors, so please consult your tax accountant.

The Maricopa County Recorder’s Office allows you to search for a copy of your deed by first and last name here if you live in the Valley. If you own your property individually or as a tenant-in-common, you should contact your attorney and discuss whether it would be beneficial to put your property in a trust or set up a transfer on death deed. A transfer on death deed works similar to a life insurance beneficiary designation – the named beneficiary receives your property after you pass away but has no right to it before your death. Because it is crucial to record everything properly with your County Recorder’s Office, you should not attempt to do this planning on your own. Always consult your attorney to make sure things get drafted and recorded properly. And make sure to let your CPA know about any home purchases, sales, transfers or ownership changes so that they can correctly report any gains, losses, and deductions associated with home ownership.

If you need any assistance with your real estate, please contact your Henry+Horne advisor and your attorney!

Jennifer King