@mack12345 wrote:
Hi Opus17. I appreciate your reply to the question on capital gains and cost basis. It's a challenge to understand cost basis and adjusted cost basis when gifted a house. You mentioned if a spouse dies, the surviving spouse, in a community property state, gets an adjusted cost basis at time of death. Did I understand this correctly? I live in CA. My parents bought a house for 100,000. Years later my dad died. The estate appraisal show the value was 250,000 at his death. My mom deeded/transferred the house to me for "no consideration" many years later prior to her death. Is my adjusted cost basis 100,000 (their purchase price) or 250,000 (FMV at time of his death)? plus improvements. Thank you and if you have any links on this, I'd appreciate it so much.
In a community property state, the spouse inherits the full stepped up basis. The only exception seems to be if the property has more than two owners, so that the spouses own less than a half share each. So your mother's basis on the day of your father's death would be the full FMV at that time, then her basis is adjusted by any improvements until she gifted it to you, when her basis becomes your basis. Then your basis is further adjusted by improvements you made after that.
(Also note, that use of the home as a rental, or in business, or home office deduction, or claiming a casualty loss, can reduce your basis.)
See IRS publication 551
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return.
https://www.irs.gov/publications/p551#en_US_201812_publink1000257014
