In this article, we wrap up co-ownership forms by completing our discussion of community property. Considerations

Married couples owning a home or investment property in a community property state may want to consider converting the ownership to joint tenancy, especially where only one spouse will be incurring the majority of the debts. This way, at least half of the value of the property will be shielded.

Another approach is to convey the entire interest to the non-business-owner spouse.  While this can be quite effective, it can at the same time be risky if there is a possibility of divorce.

Still another approach is to remove the property from community property status so each spouse is considered owning one-half of the asset as his or her separate property, or jointly own the property in the tenants in common form of co-ownership we previously discussed.

In order to opt out of community property law with respect to some or all of your property, both spouses must sign what is known as a “transmutation agreement." This document should be carefully drafted by an attorney.  It transforms property ownership into whichever form you desire that is available in your state.  It can also be drafted to cover your existing property as well as property acquired in the future.

However, any change in ownership here should be carefully considered.  The community property co-ownership form was designed to grant equal property rights to spouses.  Thus, changes may involve giving up some of these rights.  Consideration must be given to the cost of doing it weighed
against the benefits derived.

Tax Advantage

Community property can provide an estate tax advantage, despite its extreme disadvantage as an asset protection tool. When a spouse dies, and the other spouse inherits the other half of the property, the survivor receives a "stepped up" basis for the WHOLE interest in the property rather than just the half he or she received. This means any appreciation in the value of the property between the time the couple originally purchased the asset and the date of the first spouse's death will not be taxed when the property is later sold.

Contrast that to joint tenancy, where upon the death of one spouse, the other gets a stepped-up basis for only that spouse's half-interest. Nevertheless, since the first $250,000 of capital gain per person from the sale of a home is now automatically tax-free, for many taxpayers there may be no real advantage here with respect to a home.  But the advantage may still exist for investment property and other assets that appreciate in value.  So, you must decide if the risks of this co-ownership form outweigh any income tax benefits in your situation.