Married couples who buy a home together often go into the housing search with a common set of expectations: that they’ll own the home together. But the reality is that owning a home together may not be the best choice for all couples. There are questions of inheritance and tax implications that you should consider when you’re deciding how to own a home as a married couple.
Questions of Inheritance
Most new couples starting out don’t have inheritance questions to worry about, but an older couple who might be on a second marriage may need to consider inheritance issues. What if one of the parties wants to leave their share of a home to a surviving child instead of the spouse? You have to answer the questions of who should get the house when you’re deciding how you should own it.
Tax implications are another important consideration for a married couple who decide to hold the home together. By holding a property jointly, some couples increase the chances that the IRS could take more money in taxes from the estate. In these cases, it may be more advantageous for one party to own the home individually to relieve tax consequences. You should talk with a tax professional to determine what type of ownership is best for you.
Joint Tenants vs. Tenants in Common
The two most common types of home ownership for married couples is joint tenancy with rights of survivorship and tenants in common. Under joint tenancy with rights of survivorship, the deceased spouse can be cleared from the title with a certified copy of the death certificate and the home belongs solely to other spouse. It’s important to note that even with a prenuptial agreement in which a share of the home is left to prior children, if you buy a home as joint tenants, the share automatically goes to the remaining spouse upon death.
Under tenant in common, each spouse can co-own a property, but each spouse can leave his or her share to anyone – not just a spouse. This is a good situation for marriages where a spouse wants to leave his or her share in the home to a child or other survivor instead of the other spouse.
Benefits of Joint Tenancy
When you buy a property, you must decide how you want to take title on the property. Joint tenancy is one of the most common ways that couples take title on a property. Joint tenancy is simple to understand, provides roughly equal rights to each member of the couple, and offers some tax benefits.
Right of Survivorship
One significant benefit of joint tenancy is the right of survivorship. If you or your spouse should die after taking joint tenancy on a property, the right of survivorship stipulates that ownership of the house passes to the surviving member of the joint tenancy. This means that if your husband (or wife) dies 20 years after buying a property, you’ll get sole ownership of the house without having to go through probate court on the property.
Tax Savings on Capital Gains
When you sell a home, you must pay taxes on any capital gains that you make as a result of the sale. Say you buy a home for $180,000 and sell it later for $300,000; you’d typically have to pay capital gains taxes on the $120,000 you made from the home sale.
Under a joint tenancy, you receive tax benefits on a stepped-up basis after the death of your spouse. This means that if you sell the home after your spouse has died, your tax liability is reduced by half. You don’t have to pay taxes on the $60,000 share of capital gains that would be your spouse’s half after his or her death.
Co-Owners can Take Joint Tenancy
When taking the title as a joint tenancy, individuals need not be married. Any co-owners can take property as a joint tenancy, as long as at least two people co-own the property. You can take title as a joint tenancy with your girlfriend or boyfriend, sibling, parent, friend or business partner; as long as there are at least two co-owners.
Benefits of Community Property
When buying a home with your spouse, one of the ways in which you can choose to take title is as community property. You can only take title as community property with your spouse, but it provides some added tax benefits and administrative possibilities, too. If you’re buying a home with your spouse, consider the benefits of community property versus joint tenancy to make sure you select the best way to take title for your home.
Tax Benefits of Community Property
In a joint tenancy, you have the tax advantage of not having to pay capital gains taxes on a deceased spouse’s portion of property appreciation. For example, under a joint tenancy, if your property appreciates a total of $120,000 between the time you buy it and the time you sell it, you’d only have to pay capital gains on your half of the appreciation – $60,000 – if your spouse dies.
When you take title as a community property, you get stepped-up tax benefits on both halves of the property ownership after your spouse dies. Essentially, this means you wouldn’t have to pay capital gains on any of the $120,000 appreciation.
Administrative Benefits of Community Property
When you take ownership of a property as a joint tenancy, the rights of survivorship stipulate that ownership of the property reverts to the surviving tenant when a co-owner dies. When property is held as community property, you can will your portion of the ownership to whomever you wish. If you want partial ownership of the property to go to the kids upon your death, or to anyone else, you can stipulate that in the will.
Six states do still allow community property with rights of survivorship; Alaska, Arizona, California, Nevada, Texas and Wisconsin. If you live in one of those states, consult an attorney if you’d like to leave your ownership share to someone other than your spouse.