Forms Of Property Ownership Between Spouses (Joint Tenancy Vs. Community Property)

One of the most commonly asked questions in marital property transactions is how title should be held between husband and wife. Traditionally, joint tenancy form was favored because of the ease of title transfer at death. However, as discussed below, title transfer at death can be as easy in community property form. More importantly, the community property form may have distinct income tax advantages.

What is Joint Tenancy?

Joint tenancy is a form of co-ownership in which two or more persons, often husband and wife, own property in equal individual interests. Right of survivorship is the key feature of a joint tenancy. A deceased joint tenant’s interest vests in the surviving joint tenant at the moment of death, without requiring probate administration. The interest vests by reason of the nature of the title and, therefore, is not subject to disposition by the deceased joint tenant’s will.

What is Community Property?

Community property is also a form of co-ownership, but is applicable only between husband and wife. Like joint tenancy property, each spouse’s interest in community property is equal during their marriage. Unlike joint tenancy, however, each spouse’s one-half community property interest is subject to disposition by the deceased spouse’s will. If no disposition is indicated, the interest will pass to the surviving spouse. Like joint tenancy, if the deceased spouse’s interest passes outright to the surviving spouse, no probate administration is required (although, in most cases, a summary and relatively inexpensive court confirmation procedure may be required). Under a new form of ownership, “community property with right of survivorship,” the asset passes on death to the surviving spouse and is not subject to disposition by the deceased spouse’s will.

Income Tax Consequences

There is no practical difference in the taxation of income from joint tenancy or community property during the joint lifetimes of the spouses. The difference may be dramatic, however, after the death of the first spouse.

As a general rule, assets acquired from a decedent as a result of death receive a new stepped-up (or stepped-down) tax basis equal to the property’s fair market value at date of death. As a consequence, if property acquired from a decedent is sold shortly after death, no gain or loss should generally be recognized. In the case of substantially appreciated property, the benefit of this basis step-up is dramatic: all gain and the income tax attributable thereto is avoided.

In the case of joint tenancy property, only the deceased spouse’s one-half interest in the property is considered acquired from a decedent and entitled to the fair market value basis adjustment. Thus, if the surviving spouse were to sell an appreciated property shortly after death, he or she would have to pay tax on the gain attributable to his or her one-half interest.

In the case of community property, however, both half interests in the property are considered acquired from a decedent and entitled to the fair market value basis adjustment. As a result, in the exact same sale scenario, the surviving spouse would pay no tax. The tax savings of the community property form can be considerable.

Conversely, if the property has lost value, joint tenancy yields the better tax result because the property will receive a one-half step-down in basis on death, as opposed to a full step-down in basis with community property.

The rules relating to step-up in basis may change significantly for deaths in 2010 and thereafter, depending on the fate of the estate tax reform act of 2001. This act currently provides for estate tax repeal and changes of basis rules for deaths in 2010, but sunsets in 2011.

Marital Dissolution

On marital dissolution, the disposition of joint property acquired with community property funds will not be affected by whether that property is held in joint tenancy or community property. If one spouse has contributed separate property to the acquisition of property held in either joint tenancy or community property form, on marital dissolution, that spouse has the right to be reimbursed for that spouse’s separate property contribution. The rules governing the characterization of property are complex. Any spouse considering making a substantial separate property contribution to an asset held in joint tenancy or community property, or converting a separate property asset to joint tenancy or community, should seek legal advice regarding the ramifications of this change.

Creditors’ Rights

There are exceptions, but generally stated, community property is liable for debts of either spouse, whereas the separate property of the non-debtor spouse, or the one-half joint tenancy interest of the non-debtor spouse, is not liable for debts of the other spouse. In some situations, concern about creditors may outweigh concern about basis increase on death, with the result that joint tenancy is favored.


Married couples should give serious consideration to the form of title of their jointly owned property. The above discussion is by no means comprehensive and form of ownership is just one of the many factors which should be considered in the context of a couple’s financial and estate planning. We would be happy to discuss with you any questions prompted by this memorandum.