Imagine this common scenario: an older married couple lives in a house they’ve owned jointly for many years and that is completely paid off. One spouse dies. What happens to the ownership of the home? What are the tax consequences, if any, for the surviving spouse? 

How Jointly Owned Property Passes at One Owner’s Death Depends on the Ownership Structure 

When a property is owned jointly, the manner in which the ownership of that property passes when one owner dies is affected by how the property is owned. In Georgia, there are two forms of joint ownership: “Joint tenants” (also known as “joint tenants with rights of survivorship,” sometimes abbreviated as “jtwros”), and “tenants in common” (sometimes abbreviated as “t in c”). There is NO SUCH THING as “joint tenants in common.” 

• If a jointly owned asset is owned as joint tenants with rights of survivorship, then by law, a deceased owner’s interest in the property passes immediately to the surviving owner or owners, outright. 

• If a jointly owned asset is owned as tenants in common, then a deceased owner’s interest will not transfer automatically to anyone. The surviving owner or owners may or may not receive the deceased owner’s interest. If the deceased owner owned his or her interest directly, and not through any kind of trust, limited liability company, or other entity, and if no right of survivorship or beneficiary designation applies to that owner’s interest in the asset at that owner’s death, then the deceased owner’s interest will become part of the deceased owner’s probate estate. Some kind of probate process will be required in order for the transfer of the decedent’s interest to be carried out. Assets in a decedent’s probate estate are controlled by the decedent’s estate planning documents, if there are any, or by the intestacy laws of the state where the decedent was domiciled (had his or her principal residence), if the decedent has no Will or revocable trust. 

For our hypothetical married couple, if they own the house as joint tenants when the first spouse dies, and if they are the only two owners, then the surviving spouse will automatically become the owner of 100% of the house when the first spouse dies. No probate process or deed to the property will be needed. If the surviving spouse wants to clarify ownership, he or she can file an Affidavit of Surviving Joint Tenant, in which he or she states that the house was owned by both spouses as joint tenants with rights of survivorship and that one of the owners has died, but this is not required. If no Affidavit of Surviving Joint Tenant is filed, the surviving spouse will generally need to produce a certified copy of the death certificate for the first spouse if he or she wishes to sell the house later. The surviving spouse should update his or her homeowner’s and other insurance to ensure that the deceased spouse is no longer listed as an owner of the home on those policies. The surviving spouse should also update the property tax records to have the deceased spouse removed as a listed owner and ensure that all property tax benefits, such as the homestead exemption, will remain available to the surviving spouse. 

Tax Treatment of a Joint Owner’s Share 

Continuing with our hypothetical, what is the tax treatment of the house after the first spouse’s death?  

Income Taxes 

Because the first spouse owned a 50% interest in the home at his or her death, the decedent’s 50% interest gets a change in income tax basis (commonly referred to as a “step up in income tax basis,” although it can also produce a reduction in basis for property that has declined in value). The new income tax basis for the decedent’s interest in the property will, in most cases, be equal to 50% of the fair market value of the home as of the decedent’s date of death (for the rare decedent with a taxable estate for whom an estate tax return is required and an alternate valuation date election is made, a different valuation date may be used). The surviving spouse’s 50% will continue to have a basis equal to 50% of the value of the basis that the couple had in the home immediately before the decedent’s death. The basis of the entire home, in the hands of the surviving spouse, will be a blended basis that is derived from combining the new basis for the decedent’s 50% interest with the surviving spouse’s basis in his or her 50% interest. The income tax basis step up effectively wipes out the capital gains income tax that a deceased owner would need to have recognized if the property had been sold immediately before his or her death.  

When the surviving spouse decides to sell the home, the surviving spouse may qualify for the exclusion from capital gains taxes that applies to income recognized on the sale of a principal residence. This exclusion can eliminate up to $500,000 in capital gains income for a married couple or up to $250,000 for a single person. To benefit from this gain exclusion, the surviving spouse must own the home in their own name (or in their own Revocable Living Trust) and must use the property as their primary residence. There is a special rule that treats a surviving spouse as still married for up to two years after their spouse’s death for the purposes of this capital gain exclusion. However, after two years, the surviving spouse is considered single again, and the exclusion becomes $250,000 (unless the surviving spouse has remarried and remains married on the date of sale).  

Estate Taxes 

At the first spouse’s death, 50% of the value of the property is included in the first spouse’s estate for federal estate tax purposes (Georgia does not have any state-level estate or inheritance taxes). If this value, when combined with the value of all of the other assets that are included in the first spouse’s estate for estate tax purposes, exceeds the value of the first spouse’s remaining federal estate tax exemption amount (now known as the Basic Exclusion Amount or BEA), then an estate tax may tentatively be due. However, if our hypothetical married couple owns the house as joint tenants with rights of survivorship or if the deceased spouse’s estate planning otherwise has the decedent’s interest in the house pass to the surviving spouse outright or in a qualifying trust, and if the surviving spouse is a U.S. citizen, then the marital estate tax deduction for transfers to a surviving spouse may be available for the value of the house. In addition, for most Americans, the BEA value will fully cover most of their assets. This means that, for most married couples, no estate taxes will be payable if their jointly owned home transfers to the surviving spouse at the first spouse’s death. 

The experienced estate planning attorneys at Metro Atlanta-based Morgan & DiSalvo can discuss with you the pros and cons of owning property jointly and the potential costs and benefits of using different forms of joint ownership. To schedule an estate planning consultation or for advice on how to best structure your current estate plan, please call our offices at (678) 720-0750 or e-mail us at info@morgandisalvo.