California Community Property: Rules, Step-Up in Basis, and Estate Planning Impact

California is one of nine community property states, and this classification profoundly affects how your estate plan works — especially the tax consequences when one spouse dies. Getting the titling right can save your family hundreds of thousands of dollars in capital gains tax. Getting it wrong can cost just as much.

Community Property vs. Separate Property

Community property includes most assets acquired by either spouse during the marriage using marital income. This covers salaries, investment gains from marital funds, real estate purchased during the marriage, and business interests built with marital effort.

Separate property includes assets owned before marriage, gifts received by one spouse alone, and inheritances. Separate property stays separate — unless it gets commingled with community assets, which is where disputes arise.

California Probate Code Section 760 establishes the presumption: all property acquired during marriage is community property unless proven otherwise. The burden is on the spouse claiming an asset is separate.

The Double Step-Up in Basis: California's Biggest Tax Advantage

This is where community property becomes a powerful estate planning tool.

Under federal tax law (IRC Section 1014(b)(6)), when one spouse dies, 100% of community property receives a stepped-up cost basis to fair market value — not just the deceased spouse's 50% share. This is called the "double step-up."

Example: You and your spouse bought a home for $400,000. It's now worth $1,400,000. In a common law state with joint tenancy, only the deceased spouse's half gets a step-up. The surviving spouse's basis would be $200,000 (original half) + $700,000 (stepped-up half) = $900,000. Selling for $1,400,000 triggers $500,000 in taxable gain.

In California with community property: the entire basis steps up to $1,400,000 at the first death. The surviving spouse can sell immediately with zero capital gains tax.

That's potentially $75,000–$119,000 in federal and state tax savings on a single asset.

Community Property With Right of Survivorship

This titling option (available under California Civil Code Section 682.1) combines the double step-up with automatic transfer at death. When one spouse dies, the surviving spouse automatically owns the entire property — no probate, no spousal property petition, no court filing.

Compare this to standard community property, where the surviving spouse may need to file a Spousal Property Petition (Form DE-221) to clear title, and to joint tenancy, which provides automatic survivorship but only a 50% step-up.

For most married California couples, community property with right of survivorship is the optimal titling for their home.

How to Change Your Property Title

If your home is currently held in joint tenancy and you want to switch to community property with right of survivorship:

1. Execute a new grant deed from yourselves as joint tenants to yourselves as community property with right of survivorship
2. Both spouses sign and notarize the deed
3. Record it with the county recorder
4. File a Preliminary Change of Ownership Report (PCOR) — interspousal transfers are exempt from property tax reassessment

The transfer itself doesn't trigger any tax consequence. It's a change in legal characterization, not a sale.

Community Property Agreements

A community property agreement (also called a transmutation agreement) allows spouses to reclassify separate property as community property — or vice versa. Under Family Code Section 850, the agreement must be in writing and signed by both spouses.

Why would you convert separate property to community? To qualify the asset for the double step-up at death. If one spouse brought a highly appreciated stock portfolio into the marriage as separate property, converting it to community property means the entire basis resets when either spouse dies.

This is a powerful but irreversible planning tool — once property is transmuted, it's subject to community property division rules in divorce.

Capital Gains Tax on Inherited Property in California

Beneficiaries who inherit property receive a stepped-up basis to the fair market value at the date of death. For community property, this applies to the full value (both halves). For separate property, only the decedent's interest steps up.

California does not have a separate state-level capital gains tax rate — capital gains are taxed as ordinary income at rates up to 13.3%. Combined with federal rates, the total tax on long-term gains can exceed 33% for high earners. The step-up in basis is the single most valuable tax benefit in California estate planning.

However, the step-up only applies to assets held at death. Assets gifted during lifetime carry over the donor's original basis — there's no step-up. This is why gifting appreciated property to family members during your lifetime is almost always a tax mistake in California.

How This Affects Your Estate Plan

The community property classification should drive several estate planning decisions:

• Title your home correctly — community property with right of survivorship if you want automatic transfer plus the double step-up
• Keep separate property documented — maintain clear records if you want to preserve the separate character of pre-marriage or inherited assets
• Think twice before gifting appreciated assets — the step-up at death eliminates gain; a lifetime gift preserves it
• Coordinate with your trust — if you use a revocable living trust, the trust should explicitly preserve the community property character of assets transferred into it

The California Basic Estate Planning Kit walks through property classification, titling options, and how to coordinate community property with trusts, TOD deeds, and beneficiary designations for maximum tax efficiency.

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