Forms of Joint Property Ownership in California

Real Estate Investment Partnerships and Real Estate Title & Ownership by Adam Pedersen, Esq.

Individuals purchasing real property in California quite often do so jointly with others.  Whether investing, starting a family, or for business purposes, sharing the benefits and burdens of property ownership often makes good sense.  We often get questions from married and non-married persons alike There are three principal ways in which parties may jointly hold title to real property in California:  1) Tenants in Common, 2) Joint Tenants, and 3) Community Property with Right of Survivorship.  These three forms of title share some commonalities but differ in some important ways. 

Tenants in Common (TIC)

A TIC is the most common way in which unrelated parties (think friends or business associates jointly take title to real property in California.  In a TIC all parties jointly share in the burdens and benefits, in accord with their respective percentage of ownership.  The shares of ownership need not be equal, however, even where the shares are unequal no co-owner can exclude another from possession or use of the property

Further, ownership is not divided “in kind” and each owner is said to own a portion of each atom of the property in accord with his or her respective share.  Absent an agreement to the contrary, each owner may freely transfer his or her interest at any time in any manner (by sale, gift, bequest, etc.).  It is the independence of each ownership share and ability to unequally apportion ownership which are the primary distinguishing characteristics of a TIC, as compared to Joint Tenancies and/or Community Property with Right of Survivorship.

Joint Tenancy (JT)

A JT has historically been the most common way in which married couples and/or close family members jointly hold title.  Joint owners likewise share in the burdens and benefits of ownership in accord with their share.  However, in a JT that share must be equal as among all co-owners.  As such, if a married couple holds a property as Joint Tenants, each holds an equal 50% interest in the property.  If there are more than two Joint Tenants, the ownership is again equally divided among them according to their number.  The parties cannot unequally divide their ownership.

The second, and arguably more important, distinguishing factor of a JT is that it includes a “right of survivorship”.  This survivorship right dictates that, upon death, the surviving co-owners automatically become equal owners of the whole.  Again, in the context of husband and wife, that means that upon the death of one spouse the other automatically becomes the owner of the whole.  Nothing is required to effectuate this change of ownership it happens by operation of law.  A certificate of death will ultimately need to be recorded with the County Recorder’s office, but no probate is required to effectuate the change.

This last paragraph hints at one important distinction in what each owner may do with his or her share during life and after death.  Like a TIC each co-owner may freely transfer his or her interest as he or she sees fit (bay sale or gift, for example) during their lifetime.  Doing so destroys the JT as to that owner’s transferred share, creating instead a TIC, and may have property tax and/or income tax implications for the recipient and the transferor, respectively.  However, unlike a TIC, as a result of the right of survivorship, no co-owner may devise his or her interest in a JT.  Because the ownership interest of the deceased automatically passes to the surviving owners upon death, the deceased has nothing to devise.   

Community Property with Right of Survivorship (CP)

CP as a form of joint ownership that was created by the legislature in 2001.  It is therefore a more modern creation than either a JT or a TIC.  In form and function, it is nearly identical to a JT: equal ownership shares with a right of survivorship.  Likewise, co-owners cannot devise their share of CP because that share passes automatically to the other upon death, it does not pass though probate and no special action is required. 

As a form of holding title, the only real distinction between a JT and CP is that CP is only available to married couples, while a JT may exist between persons wholly unrelated to one another.  The other main distinction between CP and a JT, which has nothing to do with title or ownership, is the potentially beneficial income tax treatment given to property held as CP, to be discussed below.

Property Tax Considerations

The State of California law assesses real property taxes annually at the rate of 1% of the property’s tax basis.  This “basis” is initially defines as the property’s fair market value at the time it was acquired.  The property is then reassessed, and the basis adjusted, each year.  However, because of California’s Proposition 13, any increase in tax basis limited to no more than 2% where there has been no “change in ownership”.   

When there is an “ownership change”, the property tax basis in the ownership interest affected is again adjusted to reflect current fair market value.  What constitutes a change in ownership isn’t always what you’d expect (a remodel, for example, may trigger an ownership change) and there are various definitions within the law as to what is, and is not, a “change in ownership”.  There are also various exemptions to reassessment that apply, even where property ownership is actually changing (for example, certain transfer between parents and children). 

While a full exploration of California’s property taxation system is outside the scope of this article, it suffices to say that a “change in ownership” and resulting reassessment at fair market value may have a substantial property tax impact.  This is because of the traditionally substantial difference between actual appreciation over time (which averages about X% per year in California) and the 2% per year limit imposed by Proposition 13.  Stated simply, a change in ownership can greatly increase one’s annual property tax bill.

When selecting a form of title, there are relevant exemptions to reassessment to be considered. First, for married couples, regardless of whether the property is jointly held as a TIC, JT or as CP, no reassessment will be made for property tax purposes where the transfer is between spouses.  See, California Revenue and Taxation Code, at section 63.  Importantly, this is remains true where is interspousal transfer is the result of a right of survivorship associated with a JT or CP.  Id

For non-married persons, transfer upon death of a JT or TIC interest may not result in a reassessment where there are only two co-owners, the surviving co-owner accedes to 100% ownership of the property, and the property has been jointly owned and was used by both as their primary residence for at least one year prior to death.  See, California Revenue and Taxation Code, at section 62.  While to law allows for this exemption to apply equally to both a TIC and a JT, a JT between two persons is arguably better designed to meet this test because of the right of survivorship associate therewith.

Income Tax Considerations

First and foremost, one’s income tax liability is a complicated issue and depends upon a multitude of other factors that may have nothing to do with a given piece of property and/or how title to that property is held (such as age income, dependents, other property or assets, etc.)  As such, an analysis of the individual tax consequences of form of title is outside the scope of this article and outside the scope of this author’s expertise.  That said, one form of title discussed herein does have potential income tax benefits to be considered.

Unique from the others forms of title discussed, taking title as CP has one other potentially important benefit to married couples which does not apply to a JT.  In a JT, when the surviving spouse receives the other’s ownership share, he or she benefits from a stepped-up basis as to that 50% share only.  The surviving spouse’s tax basis in his or her own 50% share remains unchanged.  However, if the property is held as CP, the surviving spouse benefits from a stepped-up basis as to the entire property.  The tax basis becomes the property’s fair market value at time of death.  A CPA or tax layer can analyze how this applies to your specific tax situation but, generally, a stepped-up basis in the entire property, as opposed to just half, can be enormously beneficial to the surviving spouse.

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