What if the joint tenants in a CP state (in this case
California) are registered Domestic Partners? The state has
tried to equalize things for Domestic Partners, but does the
Federal Government go along with this.
No, the federal government (i.e. Congress) does NOT
recognize Domestic Partners as being the same as married
spouses. You must file as SINGLE (or possible HOH if there
are dependent children involved). Filing as MARRIED
(separate or joint) is not available to you on the federal
level.
The $500,000 exclusion works when both partners are alive and sell, but
what happens when one partner dies as far as federal taxes
are concerned? The same as a married couple?
Not quite correct. IF each partner meets the ownership and
occupancy requirements (2 of the 5 years prior to sale),
THEN each gets to claim up to $250,000 exclusion on their
portion of the gain. If there is only one owner, then the
exclusion is only $250,000 in total.
If one co-owner dies, the cost basis of his/her portion of
the house is "stepped up" to the proportionate market value
on the date of death. The cost basis of the surviving
partner is not affected for federal purposes. This adjusted
basis becomes the asset value for the estate return (if
required) of the decedent. If the house is sold in the same
year, there would be no tax liability on the decedent's
income tax return, due to the increased basis and potential
$250,000 exclusion. The surviving co-owner would have a
$250,000 exclusion, but retains his/her original adjusted
basis.
If the house is not sold, or is sold in a following year,
the tax consequences to the surviving co-owner are similar.
The BENEFICIARY of the estate would receive his/her portion
of the house with the stepped up cost basis, and may have a
gain on the sale.