Avoid Property Capital Gains Taxes with a Postnup
Often when couples marry later in life, one or both of them own valuable real estate that they have either inherited or purchased prior to their marriage. They may want to limit or eliminate their capital gains tax on that property should their new spouse pre-decease them.
If that is the case in your situation, an experienced family law attorney can draft a Stepped-Up Basis Postnup for that purpose. Essentially, a Stepped-Up Basis Postnup can be used to transmute property that you own separately prior to your marriage to community property, in order to avoid tax liability upon you or your spouse’s death. You’ll want to be aware, however, that if you and your new spouse decide to later divorce, with a Stepped-Up Basis Postnup, your previously separately real estate will now be community property, and your new spouse will be entitled to half its increase in value.
Here is how a Stepped-Up Basis Postnup works
First, what does a step-up in basis mean? Step-up in basis refers to the adjustment in the cost basis of an inherited asset to its fair market value on the date of the decedent’s death. Cost basis is what determines the taxes owed, if any, when the asset is sold. Cost basis starts with the price paid for an asset, plus any additional costs added over time to improve or maintain the original asset. The tax code allows for the raising of the cost basis to the asset’s higher price, minimizing the capital gains taxes owed, if the asset is sold later.
Here are some examples of how that works with a Stepped-Up Basis Postnup in place:
Jennifer and Steven marry and decide to draw up a Stepped-Up Basis Postnup. Steven has a separate property home before their marriage which was worth $500,000 when they married. Steven later passes, leaving Jennifer the home, which is now worth $2,000,000. Jennifer owes no capital gains taxes if she decides to immediately sell the home. She will owe capital gains taxes if the home increases in value again before she sells it.
Jennifer and Steven marry and decide to draw up a Stepped-Up Basis Postnup. Steven has a separate property home before their marriage which was worth $500,000 when they married. Jennifer dies first when the home is worth $2,000,000. Steven owes no capital gains taxes if he decides to immediately sell the home. He will owe capital gains taxes if the home increases in value again before he sells it.
Jennifer and Steven marry and decide to draw up a Stepped-Up Basis Postnup. Steven has a separate property home before their marriage which was worth $500,000 when they married. Steven and Jennifer later divorce when the home is worth $2,000,000. Jennifer owns half of the home’s increased value, or $750,000. Steven owns the original value of the home plus half of the home’s increased value, or $1,250,000.
Here are some examples without a Stepped-Up Basis Postnup:
Jennifer and Steven marry and do not draw up a Stepped-Up Basis Postnup. Steven has a separate property home before their marriage which was worth $500,000 when they married. Steven later passes, leaving Jennifer the home, which is now worth $2,000,000. Jennifer owes no capital gains taxes if she decides to immediately sell the home. She will owe capital gains taxes if the home increases in value again before she sells it.
Jennifer and Steven marry and do not draw up a Stepped-Up Basis Postnup. Steven has a separate property home before their marriage which was worth $500,000 when they married. Jennifer dies first when the home is worth $2,000,000. Steven will need to pay capital gains on $1,500,000, on the stepped-up basis of the home.
Jennifer and Steven marry and do not draw up a Stepped-Up Basis Postnup. Steven has a separate property home before their marriage which was worth $500,000 when they married. Steven and Jennifer later divorce when the home is worth $2,000,000. Because the home is still Stephen’s separate property, Jennifer should not get any of the home’s increase in value, as long as the couple has truly kept the property separate throughout their marriage.
Contact me for assistance
If you are considering a postnup or prenuptial agreement as part of your estate planning, please contact my office for a consultation. As San Francisco Bay Area family law attorneys, we have worked with many couples who wish to protect their pre-marriage assets, as well as leave a fair inheritance for their prior-marriage children, grandchildren and surviving spouse, upon their death.
Warren Major LLP is a Marin County CA family law firm specializing in divorce, child custody and support, marital contracts and other family law issues.
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