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Section 121 & community property


Max W

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Client sold home last year that had been purchased in 1986.  The following year she got married, but did not change title to house.  Husband contributed to mortgage payments effectively making house community property (CA).  He died in 2009.  Is there any way she can claim stepped up basis?   

TIA

 

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55 minutes ago, Abby Normal said:

Sounds like a good subject for the tax court. Can a beneficial owner get a step up in basis?

Yes, that is what it would probably turn to.  What I have been able to find out is that if the client and spouse had split up before he died, he would have to go to court to claim community property.  It is not automatic.  Essentially, she gifted him half, but there would be no basis as it would have between spouses.

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This is very interesting.  Here is my un-researched take on this:

She brings a home that was very recently purchased into marriage.  It has a mortgage, but we don't know if it is most of the value of the home or not.  The are married from 1987 until his death in 2009, or 12 years.  We are assuming that they treated the home as a community asset, because the post says they used community funds to pay for the mortgage, etc.  

If you can somehow document the funds that were used to pay the mortgage are substantial enough, and that he did in fact contribute to the community, then yes, the new basis in the property is the FMV of the home on his DOD.

Now, if she was independently wealthy, the mortgage was really paid from the interest on her investments she brought into the marriage, and he was nothing more than a glorified "boy toy" for her, it might be a problem.   Or, if there is a pre-nup that states that her assets remain hers, you are on dangerous grounds.

But if he had a job or income stream that paid a good portion of the community expenses, I think you are there.

Can you document that they always had joint checking accounts that were used to pay the mortgage, Taxes and maintenance on the home?   Was there a major remodel that was paid for out of community funds?   Is there any trust or will that states that the "marriage residence" goes to the survivor if one dies?

I think this argument can be won if the facts and circumstance back it up.  I would do some more research, but I think you have a strong position if they treated the property as a community asset.   Especially since the state is CA, which has a history of assigning community to assets that are not strictly treated as separate assets. With 12 years of marriage I think this is a good position.

Don't quote me on this though, I could be very wrong.

Tom
Modesto, CA

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Tom, thanks for your hypotheses.  They certainly provide some avenues to pursue.  The house was re-fied in 2005 and spouse's name was on the loan papers and it was paid out of a joint account, although there are no longer any records to substantiate it.

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