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Start 2015 Tax Planning Now! Part 2



Tax Code Changes Create Challenges

What should partners who married under California’s Equal Marriage Law be concerned about or plan for in terms of taxes?

Same sex marriage is now recognized in California. This means, from a tax perspective, same sex married couples face the same issues as opposite sex couples. They are also eligible to take advantage of what we call the “biggest tax loophole of all time” – the double step-up in basis on community property.

This is a section of the tax code that stipulates when property is held as community property and one spouse dies, the appreciation on the property is not taxed to the surviving spouse when he/she disposes of the property. For example, suppose Fred and Barney bought their house in 1969 for $37,000 and titled it as community property. Let us say that today it has a fair market value of $650,000. Were Fred to pass away, the house would assume a stepped-up tax basis (for income tax purposes – not property tax) of $650,000.

Assuming Barney sold the house the next day for $650,000, he could pocket the entire $650,000 without paying a penny in federal or state income tax. These rules apply to any community property asset (i.e. stocks, investment property, etc.) owned by a married couple regardless of the increase in value, married couple regardless of the increase in value, so even if Barney sold the house for $20 million, all of the gain would still be tax free.

The bottom line is same sex married couples should consider retitling property from joint tenancy to community property for estate planning purposes. One note of caution, what is good for avoiding estate taxes, may not be so good in the event of a divorce.

Next:  Part 3

Missed a Part?  See Part 1, Part 4

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David Ellis is the managing partner of Ellis & Ellis, CPAs, Inc. located in Pasadena, California. He has over 25 years of experience in the practice of Divorce, Trust/Estate, and other family tax matters. He is an advisor in matters pertaining to Trust, Estate, and Corporate Taxation to the Los Angeles County Office of the Public Guardian. The firm also provides other general tax services and IRS representation. He earned his Bachelor’s Degree from the University of Southern California in Communication Arts and Sciences. He is a frequent writer and speaker on various tax subjects, and has provided continuing education services to other CPAs and tax professional in the area of Divorce, Trust, and Estate Taxation. An article that he recently co-authored entitled The Tax Consequences of Dividing Marital Property can be found in the December 2014 issue of Practical Tax Strategies, a national professional tax publication.

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