Property Conversion After Marriage
Q. Before my recent marriage, I sold a home for $250,000. To avoid a tax hit, I purchased a home for the same amount. Even though I am now married, the home is listed in my name alone.
Now I would like to make this house community property. May I? And if so, how do I do it? Should my husband die before I do, would the home be entitled to a full step-up in value, allowing me to sell it immediately without paying capital gains tax? If I continue holding the home in my name alone, am I obligated to make mortgage and property tax payments out of my earnings, or may community property funds be used for these payments? -- L.M.G .
A. Let’s start by saying that you would be wise to consult a trusted lawyer before making any moves.
Although divorce is probably not in your vocabulary right now, you should remember that about 50% of American marriages end up that way. Unless your divorce turns out to be extremely amiable, you could find it impossible to reclaim what you gave up. Once the community property gift is made, you are not entitled to change your mind.
That said, you should find no difficulty converting your home to community property. Simply file a deed in the county recorder’s office.
It may either be a grant deed or a quit claim deed; a quit claim deed is generally easier. Also, check with the county assessor’s office to be sure that your giving half the property to your husband is not mistakenly listed as a sale, thereby triggering a reassessment for property tax purposes. The assessor’s office should be able to tell you if you need to file a special form because your transfer is exempt from a property tax reassessment.
If your husband dies before you, the home, as community property, would be entitled to a full step-up in value to that on his date of death. However, be warned that just because assets are held as community property does not mean that a spouse must leave his or her share to the survivor.
Another potential issue here is a fairly recent federal law (Internal Revenue Service Code Sect. 1041 [e]) denying a step-up in value to assets converted to community property within one year before the death of one spouse.
You may also be interested to know that you may sell the half-interest in your home to your husband without paying any tax on the proceeds you receive. The transaction is treated as a gift between spouses--there are no limits on gifts between spouses--and your tax basis in the property would remain unchanged.
The home would still be entitled to a full step-up value upon the death of either of you. Although the sale would technically trigger a reassessment for property tax purposes, if your sale of the half-interest is based on your actual purchase price, you wouldn’t face any additional property tax obligation.
Accountants and estate lawyers argue that tax obligations should not be the sole consideration in financial planning, asset deployment and estate preparation. For example, what would happen to your home should you die before your husband? If you have children from a previous marriage, they could be left out of your estate if all your assets are held as community property.
Finally, if you continue holding your home as your sole and separate property, you are not prohibited from using community property funds to pay the monthly mortgage and other expenses, but you may jeopardize your claim as the property’s sole owner.
What Do Various Types of Insurance Cover?
Q. What does state disability insurance cover? Who contributes, employers or employees? How does this differ from workers’ compensation and unemployment insurance? -- T.R.S .
A. State disability insurance is funded entirely by employee contributions. For 1995, workers will contribute 1% of their first $31,767 in wages.
Workers may make a claim if they become disabled for virtually any reason and are unable to work. Payments last for a maximum of 52 consecutive weeks. Currently, you may be entitled to receive up to a maximum of $336 weekly, depending on what you earned before making the claim.
Even if you are not currently contributing to state disability insurance, you may still be covered by the fund if you have made contributions within what is termed the “base period,” or about 18 months into the past.
Workers’ compensation insurance is funded entirely by employers. To make a claim, you must have suffered a work-related disability. There is no time limit on payments from the fund.
Claimants are entitled to maximum payments of $406 per week, plus medical expense coverage.
Unemployment insurance, also paid for entirely by employer contributions, is designed to provide workers a weekly income when they are out of work through no fault of their own.
Currently, employers are assessed a rate somewhere between 1.1% and 5.4% of the first $7,000 earned by each employee. The jobless are entitled to 26 consecutive weeks of payments, the amount varying with one’s earnings. The maximum weekly payment is $230.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not phone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
