Arizona is a community property state so property acquired by a married couple is presumed to be community property unless legally specified otherwise. Title may be held as “sole and separate.” If a married person acquires title as sole and separate, his or her spouse must execute a disclaimer deed to avoid the presumption of community property. Parties may choose to hold title in the name of an entity, such as a corporation; limited liability company; a partnership, or a trust. Following are the most common examples of holding title. How title is held has significant consequences so please consult a professional for further information.
COMMUNITY PROPERTY
Requires a valid marriage between two persons.
Each spouse holds an undivided one-half interest in the estate.
One spouse cannot partition (divide) the property by selling his or her interest.
Requires signatures of both spouses to convey or encumber.
Each spouse can devise (will) one-half of the community property.
Upon death the estate of the decedent must go through probate, affidavit or adjudication.
Both halves of the community property are entitled to a “stepped up”* tax basis as of the date of death.
JOINT TENANCY WITH RIGHT OF SURVIVORSHIP
Parties need not be married; may be many joint tenants.
Each joint tenant holds an equal and undivided interest in the estate, unity of interest.
One joint tenant can partition (divide) the property by selling his or her interest.
Requires signatures of all joint tenants to convey or encumber the whole.
Estate passes to surviving joint tenants outside of probate.
No court action required to clear title upon the death of joint tenant(s).
Deceased tenant’s share is entitled to a “stepped up”* tax basis as of the date of death.
COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP
Requires a valid marriage between two persons.
Each spouse holds an undivided one-half interest in the estate.
One spouse cannot partition (divide) the property by selling his or her interest.
Requires signatures of both spouses to convey or encumber.
Estate passes to the surviving spouse outside of probate.
No court action required to clear title upon the first death.
Both halves of the community property are entitled to a “stepped up”* tax basis.
TENANCY IN COMMON
Parties need not be married; may be many tenants in common.
Each tenant in common holds an undivided fractional interest in the estate. Can be disproportionate, such as 20% and 80%; 60% and 40%; etc.
Each tenant’s share can be conveyed, encumbered (mortgaged) or devised (willed) to a third party.
Requires signatures of all tenants to convey or encumber the whole.
Upon death the tenant’s proportionate share passes to his or her heirs by will, trust or intestacy.
Upon death the decedent’s share must go through probate, affidavit or adjudication.
Each share has its own tax basis.
*Stepped up tax basis. Under this rule, an heir receives a basis in inherited property equal to its date-of-death value. If your uncle bought XYZ stock in 1940 for $500 and it’s worth $5 million at his death, the basis is stepped up to $5 million in the hands of his heirs and all of that gain escapes federal income tax forever.
This rule applies to inherited property that’s includible in the deceased’s gross estate and to property inherited from foreign persons who aren’t subject to U.S. estate tax. It also applies to the inherited portion of property owned by an inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before inheritance. This rule does not apply to reinvestments of estate assets by fiduciaries.
