Converting Separate Property To Community Property - Avoid Tax

It is common for a spouse who lives in a community property state to own separate property. Community property states include Arizona, California, Idaho, , Nevada, New Mexico, Texas, Washington, and Wisconsin.

In general, separate property consists of assets acquired by a spouse through a gift or inheritance, or assets acquired by a spouse prior to the marriage. Sometimes a family can benefit from a spouse converting separate property to community.

Example. Martha has separate property currently valued at $1,000,000. When she acquired the separate property decades earlier, it's value was $100,000. If Martha sells this separate property during her lifetime, regardless of when her husband, Donald, dies, Martha will pay capital gains tax on the $900,000 gain.

However, if Martha converted this separate property to community property, and then Donald died, all of it would get a step-up in basis when Donald died.

Section 1014(b)(6) of the Internal Revenue Code is the provision that provides that all community property gets a step-up in basis when the first spouse dies - not just the half of the community that was owned by the deceased spouse.

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Paul Rabalais
Estate Planning Attorney
www.RabalaisEstatePlanning.com