Accession Real Estate
The term “accession real estate” means personal property that has been added to or enhanced in value by any non-exempt use, such as household goods and pets. It may include such items:
- Property acquired jointly with a spouse such as a residence or an automobile, stock held in a family business, and wages earned during the marriage if the wages were reported on a joint tax return.
- Personal property used in connection with exempt assets. For example, an oriental rug rolled up and stored beneath a bed with other clothing would be part of the exempt home furnishing.
- Income-producing, not exempt property, stocks, bonds, or other assets that do not produce exempt income. If you contribute such an asset to your household through joint ownership (such as a savings account) and the investment has taxable earnings, the earnings attributable to your contribution would be considered accession property.
Tax on any appreciation
In general, any appreciation in value that occurs after the date of acquisition concerning those assets described above will be considered “accession real estate.” In addition, assets held for personal use only may also be subject to tax on any appreciation that occurs after their purchase if they have been used as collateral for a loan.
For example; assume you purchased one thousand shares of stock in your sole name for $10,000. You later take out a loan secured by this same stock and use the collateral to buy a car. The fair market value of this exact one thousand shares increases to $15,000 when you purchase the vehicle. Since you have used the stock as collateral for a loan, additional consideration is given to it by its being so used. Therefore, you are considered to have purchased $1,500 shares at $10,000 even though you bought only $1,000 shares for that sum.
Property acquired during a marriage
Properties acquired before marriage or property acquired during marriage but maintained as separate property is not subject to tax on any appreciation that occurs after their purchase, unless they have been used as collateral for a loan, in which case the same rules apply as discussed above.
Any appreciation of tax-exempt assets is not accession property and is never subject to tax since no consideration is ever given for those assets. For example, preference on United States Savings Bonds (or any other similar bond) or stock acquired through an employee stock option plan is considered to be exempt from federal income tax.
Thus, this type of appreciation cannot be subjected to the capital gains tax that would otherwise apply if you received taxable compensation for your contribution toward the creation or increase in value of such assets. Similarly, any gain on funds contributed by a spouse to a community asset will generally not be taxed as an accession gain, even though it may also become taxable as ordinary income to the contributing spouse.
Property for sale or exchange
Property considered to be held for sale or exchange at its fair market value is not subject to tax on any appreciation that occurs after acquisition. Thus, if you purchased an unencumbered vacation home that you intended to hold for sale at its fair market value, all appreciation emerging after acquisition would not be accession property.
Tax on assets that used during the marriage
People often wonder why they must pay capital gains tax on assets they used during a marriage, which were bought with family money or labor even though they may have contributed little toward their purchase price relative to their spouse’s contribution. For example, one spouse may have purchased almost $100,000 worth of stock with “separate” (non-community) money. This spouse then takes out a loan and uses the stock as collateral for that loan to buy a boat, which they use during their marriage.
On this boat is installed the engine bought with community funds and labor paid for by both spouses. If these same assets were held outside of marriage (and thus outside of community property), no taxes would be imposed when the couple sells them. Still, because it is considered accession property owned during the marriage, capital gains tax is due when sold at a profit.
The exception to this rule
The one exception to this rule occurs in some states when an asset has appreciated due only to inflation at $100 per year or less per item or unit. In such cases, no increase in value is considered to have occurred. In other words, when you add the effects of inflation to the asset’s original price, there has been no increase in its absolute value even though it may have increased in nominal value. Any appreciation that occurs after acquisition due only to inflation generally will not be subject to capital gains tax since no consideration was given for this type of appreciation.
Example of Accession; how capital gains tax works
Husband had $5,000 worth of stock which he purchased with his separate funds long before marriage. Wife contributed $10,000 toward the purchase of home during the marriage but had never owned any stocks or bonds at any time before marriage. Home had a cost basis of $15,000 and was purchased with $5,000 in community funds and $10,000 in wife’s separate funds; Husband used the home as collateral for the loan to buy car which is considered accession property since it has been used as an integral part of the household.
In this example, the husband must pay capital gains tax on any appreciation that occurs after acquisition even though he may have contributed very little to his wife toward the purchase price of the assets. This would happen if he sold all three assets after a few years. Here’s how:
First, we’ll calculate the gain on the sale of the stock:
- Stock bought for $5,000 and sold for $10,000 has a gain of $5,000.
- Gain on stock is considered to be capital gains and must be reported as taxable income.
Then, we’ll calculate the gain on the home:
- Basis = Cost basis + Community funds contributed toward purchase price (15,000 + 5,000) = $20,000
- Price = 20,500 (this is calculated by taking a cost basis of $20,500 less community funds contributed toward the purchase price, which equals 5,500).
- Gain on sale of home is computed by subtracting the cost basis from sales price: $20,500 – $20,000 = $500
- Gain on sale of home is considered to be capital gains and must be reported as taxable income.
Finally, we’ll calculate the gain on the car:
- Car cost basis = Total payments made toward purchase price + Sales price at resale – Loan amount at resale = (15,000 + 15,000 – 15,500) = $30,000
- Gain on sale of the car is computed by subtracting the cost basis from sales price: $30,000 – $30,000 = 0, since there has been no appreciation in value due only to inflation (cost basis equals sales price), no capital gains tax is required.