Same-Sex Marriage Ruling: What it Means for Real Estate

While property rights are generally a state issue, the federal recognition of marriage for gay couples will have a significant impact on home owners.

July 1, 2013

Married same-sex couples in 13 states and the District of Columbia are now or will soon be eligible for more than 1,100 federal benefits and protections denied under the Clinton-era Defense of Marriage Act. A key provision of the federal law, which withheld benefits from gay couples who had been lawfully married in those states that permit it, was struck down last week by the Supreme Court. And though property rights are set at the state level, the ruling has bearing on a number of real estate–related matters that involve federal law.

The ruling may influence how couples decide to hold title on a property. It will affect the calculation of estate taxes owed when a spouse dies and how much capital gain is exempt from taxes in the sale of a home that is owned in the name of only one member of the couple.

For real estate practitioners, “understanding the status of [your clients’] relationship is critical if you are in a jurisdiction that recognizes marriage” for gay couples, says Los Angeles attorney Wendy E. Hartmann, who specializes in tax and estate planning for same-sex couples. Practitioners should, however, encourage couples to obtain legal advice on such title and tax matters from an attorney, she noted.

Before the court decision, gay couples did not have the option to hold title through “tenancy by the entirety,” which is available only to legally married home owners. Like joint tenancy, this form of ownership means each spouse owns 100 percent of the property and an equal right to possess the home, and provides that when one spouse dies, the surviving spouse automatically becomes the property’s sole owner. Unlike joint tenancy, however, under tenancy by the entirety the home is more fully protected from creditors.

Hartmann cautions that before spouses rush to change the form of title through which a home is owned, it’s important for them to consider that when a home is sold, the $500,000 capital gains exemption will be available to gay married couples when they file federal taxes jointly, even if the deed remains only in one spouse’s name.

“There may be good reasons that a spouse who owned a property at the start of a relationship may not wish to add his or her spouse to the deed. But under the ruling, they are still eligible for the $500,000 exclusion if they file their federal taxes jointly,” she says.

Under the federal tax code’s “unlimited marital deduction,” which addresses the transfer of property to the surviving spouse when one spouse dies or when a marriage is dissolved, married gay couples will see a significant effect because those transfers will “no longer trigger a gift tax consequence,” Hartmann says. By comparison, couples who live in states where their relationships are recognized as civil unions or domestic partnerships—but not marriage—are not afforded that benefit.    

While the dismantling of DOMA provides clear-cut benefits for married gay couples who reside in the states they were married in, it creates significant ambiguities in other situations. For example, the immediate future is murky for partners who were legally married in one state but move to a state that does not recognize their union. For now, these people are caught in a confusing tangle of laws.

In Minnesota, where marriage for same-sex couples will become legal on August 1, the Minneapolis Association of REALTORS® is eagerly anticipating the near simultaneous federal recognition. “The laws that are based on marriage will now be fully applied to people the same way whether they are part of a same-sex couple or a heterosexual couple, “ says MAR public affairs director Julia Parenteau. She has identified 110 Minnesota statutes that explicitly apply to marital status and housing. Before now, “we’ve been telling members that if they’ve been selling property to same-sex couples and addressing their issues the same way as they do straight couples, they’re doing it wrong,” says Parenteau. “Now that the federal law will come into play, this will makes the lives of agents a whole lot easier in that they don’t have to worry about more than 100 laws”  that take into account marital status.

The DOMA ruling is also expected to increase the pressure on states where marriage equality has been on the legislative agenda but has not yet been approved, including Illinois, New Jersey, and Hawaii. “The inequality among the states will become more visible and obvious when some people can claim federal benefits and others cannot,” says Jennifer Pizer, director of the Law and Policy Project at Lambda Legal, a nonprofit organization working for the civil rights of lesbians and gays. “Equal treatment would be in their grasp except for the discriminatory state laws that keep it from occurring.”

And with the federal government obligated to make federal marriage-based benefits available, Hartmann notes, states that don’t offer the right to marry could see an exodus of gay people, while “states where marriage is available [for gays] could see an influx in their population.”

The Supreme Court last week also cleared the way for the reinstatement of marriage rights for gay couples in California, ruling that the supporters of Proposition 8, the ballot measure that invalidated same-sex marriage in the state, did not have legal standing to appeal a ruling holding Proposition 8 unconstitutional. When California residents are added to the mix, according to Lambda, approximately 30 percent of Americans will live in states permitting same-sex marriage.