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  • Barry Boscoe

Comprehensive Guide to Elective Community Property 



In the evolving landscape of remote and hybrid work, many state legislatures are creatively attracting new residents. An emerging trend is the option for married couples from community property (CP) states to retain community property treatment of their assets when moving to non-CP states. This legislative change holds significant implications for income tax benefits. 

Background: Community Property Law in the U.S. 

Typically, only nine states in the U.S. follow community property law as a default. Under this law, all assets earned or acquired during the marriage are considered jointly owned, irrespective of who earned them or in whose name they are registered. For instance, a couple in California, where community property law is the norm, shares equal rights over assets like stock options received by one spouse during the marriage. 

The Shift to Elective CP Laws 

A growing trend in non-CP states is the introduction of elective CP laws. These laws allow residents in these states to opt for community property treatment of their jointly owned assets. This choice can lead to considerable capital gains tax savings. 

Tax Basis, Capital Gains, and the Basis Step-Up 

Understanding Tax Basis and Capital Gains  The tax basis of an asset is essentially its acquisition cost, and capital gains represent the profit made upon selling the asset. For example, selling a house bought for $200,000 at $600,000 today would result in $400,000 of capital gains. A higher basis reduces capital gains, lowering the tax burden. 

Basis Step-Up Upon Death 

The tax basis of an asset is typically adjusted to the fair market value at the owner's death. This step-up in basis can significantly reduce the capital gains tax for the heir. For example, if a house with a purchase basis of $200,000 is inherited when its market value is $600,000, the new basis for the heir becomes $600,000, potentially eliminating capital gains tax if sold soon after. 

The Advantage of Double Basis Step-Up in CP States 

Double Basis Step-Up Explained 

In CP states, the double basis step-up allows both halves of a community property asset to be stepped up to the fair market value upon the first spouse's death. This contrasts with non-CP states, where only the deceased spouse's portion of a jointly owned asset receives a basis step-up. 

Example: Non-CP State vs. CP State 

Consider a couple in Florida (a non-CP state) and another in California (a CP state), each owning a home worth $200,000 initially and $600,000 at the time of the first spouse's death. In Florida, the surviving spouse’s capital gains tax is calculated on a basis of $400,000. In contrast, in California, the entire home's value steps up to $600,000, potentially eliminating capital gains tax. 

The Growing Trend of Elective CP and Its Implications 

Elective CP in Non-CP States 

Some non-CP states now allow married couples to elect CP treatment for their assets. This move caters to individuals relocating from CP states who wish to retain CP benefits and residents seeking income tax advantages. 

Considerations in Electing CP 

Opting for CP has its challenges. It creates an assumption of equal division of assets in divorce, potentially loses certain creditor protection features, and can affect asset disposition control within a marriage. These are considerations which need to be assessed before opting for CP status. 

Case Study: Bezos-Scott Divorce 

The high-profile divorce of Jeff Bezos and Mackenzie Scott in Washington (a CP state) exemplifies the equal division presumption under CP law. Their Amazon stock was presumed to be divided equally due to the state's CP laws. 

Conclusion 

The rise of elective community property laws in non-CP states presents new opportunities and challenges for those moving from a CP state to a non-CP state or for those living in a non-CP state. Understanding these laws and their tax implications is crucial. 

If you would like to learn more about elective CP, please contact me at:  


Office: 818-342-9950 

Mobile: 818-802-0686 

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