Capital Gains Taxes – Example

Jack and Jill, married in 1950, bought their home in California for $30,000 in 1960. They made improvements that cost them an additional $20,000. Jack died in 1996, and at that time Jill had the home professionally valued at $400,000 (fair market value). Jill still lives in the home, but now wants to sell it.

How much capital gains tax will be due if Jill sells the home for $650,000 (net)? The answer depends on whether Jack and Jill held the home as joint tenants or as community property when Jack died.

The net proceeds from the sale of the home is the starting point for determining capital gains. Then, subtract the cost basis (usually original cost plus the cost of improvements). The result is the amount of capital gain. When Jack died, however, all or part of the home obtained a new cost basis (called "stepped-up basis" in this case), based on the fair market value of the home at the date of Jack’s death. If the home were held as joint tenants, only Jack’s share (50%) would receive a "stepped-up basis". If the home were held as community property, both Jack’s and Jill’s shares (totalling100%) would receive a "stepped-up basis". (If the home had declined in value, it would have gotten a new "stepped-down basis", based on the fair market value of the home when Jack died.)

Comparing Chart A (Joint Tenants) to Chart B (Community Property) shows the difference.