Suppose two people bought a property in 1990 for $200,000. The property is now worth $1,000,000. Each owner has an original basis of $100,000 (half of the original purchase price). When on joint tenant dies, the other joint tenant receives a step up in the basis on the half of the property that is transferred to them through right of survivorship. So in this scenario, the surviving joint tenant’s original half still has a basis of $50,000, however the second half transferred receives a stepped up basis to the current market value of the property at the time of death of the co-tenant, which would be $500,000 instead of $100,000. What does this mean?
The basis for the property is used to determine the capital gain upon sale. The long-term capital gain tax rate is 20%. If you sold the property for $1,000,000 with no stepped up basis, the capital gain would be $800,000- which is well above the capital gain exemption of $250,000 for single person, and $500,000 for married couples. In this scenario $550,000 would be subject to capital gains tax which would be $110,000 in capital gains tax.
Since the basis steps up to $500,000, the capital gain is only $400,000 ($1,000,0000 sale price – $500,000 basis on ½ and $100,000 on other half) when the property is sold for $1,000,000. After subtracting $250,000 for the single person capital gain exemption, this leaves $150,000 capital gain that is subject to tax which would be $30,000 in capital gains tax.
This is a tax benefit you do not get with Tenants in Common. However Community property offers an even bigger tax advantage than joint tenancy but is only for people who are married.