California Joint Tenancy Proportional Interest Transfer Rule

When we help our California clients create their living trust estate plan, we prepare and record a deed transferring the title of their home to their living trust. Real property is subject to probate, so the family home and any rental properties need to be transferred to the living trust to avoid probate.

Most of our clients who don't yet have a living trust own their property in their name, or if they are married, in joint tenancy with each other. Transferring title to their living trust is not considered a change in ownership with the county assessor, and, therefore, the property tax remains the same.

However, the home is sometimes titled in joint tenancy with the husband, wife, and parent. This article will discuss the property tax and probate issues involved in a three-person joint tenancy and make recommendations.

Real-Life Joint Tenancy Problem

Let's use a recent client situation. Our client, the husband and wife, set up their living trust with one of our attorneys. Their living trust aims to ensure an efficient and cost-effective transfer of their assets when they pass away. In other words, to put a mechanism in place to avoid the high costs and hassles of California probate and to make it easy to transfer their assets to their children.

The deed to our client's home was titled in our client's name in joint tenancy with the husband's dad. We knew that by transferring our client's interest to their living trust, we would terminate the joint tenancy, and we had to consider whether the transfer would be considered a change in ownership and trigger reassessment and an increased property tax.

Under California law, ownership transfers of real property are considered a "change in ownership," which triggers a reassessment by the county assessor and increases the property tax - unless there is an exception to the rule.

Before February 16, 2021, when California Proposition 19 went into effect, transfers of real property from parents to children, whether the family home or rental properties, were generally excluded from reassessment. This was called the parent-child exclusion. However, Proposition 19 gutted the parent-child exclusion. The only remaining parent-to-child exclusion is for a transfer of the parent's primary residence where one of the children intends to make it their primary residence.

Our situation doesn't fall under the Proposition 19 parent-child exclusion because the husband's dad never lived in the home. Therefore, we need to review the California joint tenancy property tax rules.

California Joint Tenancy and Proportional Ownership

The California joint tenancy property tax rules are found in California Board of Equalization Rule 462.040.

The general rule for change in ownership for joint tenancy is found in Rule 462.040(a):

The creation, transfer, or termination of a joint tenancy interest is a change in ownership of the interest transferred.

When the county assessor characterizes a property transfer as a "change in ownership," it will reassess the property, resulting in a property tax increase.

Termination of a joint tenancy will trigger a reassessment.

However, there are exceptions to this general rule.

Rule 462.040(b)(D)(2) is the rule for the joint tenancy proportional ownership interest exception: 

If the transfer is between or among co-owners and results in a change in the method of holding title but does not result in a change in the proportional interests of the co-owners, such as:

A transfer terminating the joint tenancy and creating separate ownerships of the property in equal interest, then there is no change in ownership and no reassessment.

A transfer terminating the joint tenancy and creating a tenancy in common of equal interests.

Example:

A and B purchased a property as joint tenants. A and B transfer the property to A and B as tenants in common. No change in ownership. The transfer is merely a change in the method of holding title.

Husband, Wife, and Dad as Joint Owners

With this rule in mind, let's return to my client's situation. The husband and wife's home is owned in joint tenancy by the husband, wife, and the husband's dad. The property is the husband and wife's home, but they needed dad on the title to qualify for the mortgage. The husband and wife made the downpayment and are making all the mortgage payments. It is their house, but dad is on the title.

Dad would like to be removed from the title, and the husband and wife would like to remove dad from the title. Can it be done without a change in ownership and reassessment? What are their options and the pros and cons of each?

Option 1: Do Nothing.

PRO. Easy. Do nothing. If they leave the title as is, there won't be a change in ownership. And if dad dies first, the husband and wife, by virtue of the joint tenancy, will receive dad's interest. (By definition, joint tenancy means when one owner dies, the remaining owners get his interest.)

Once dad dies, they can transfer their 100% interest to their living trust. Until then, they can confirm their intent to have their home in their living trust in their Schedule of Trust Property.

CON. When dad dies, there will be a change in ownership for dad's interest, resulting in a reassessment of his 1/3 interest and an increase in property tax on his 1/3 interest.

What if the husband and wife die first? Unless dad has created a will or living trust specifically stating that the home must be distributed to the husband and wife's children, then someone else—dad's new wife or his other children—may inherit the home. And unless he has a living trust, the home will be subject to probate.

Option 2. Transfer title from joint tenancy to tenancy in common, then each create living trusts and transfer their interests to their respective living trust.

The husband, wife, and dad record a deed that changes the form of ownership from joint tenancy to tenancy in common. 

PRO. This would be a proportional ownership transfer, so it would not be a change in ownership and would not be subject to reassessment.

This is the example in Rule 462.040(b)(D)(2): A transfer terminating the joint tenancy and creating a tenancy in common of equal interests.

Then, the husband and wife could transfer their 2/3 interest to their living trust.

CON. Dad would still need to create his own living trust with specific instructions to transfer his 1/3 interest in the home to the husband and wife. But if he doesn't, his 1/3 interest could go to his new wife or his other children and be subject to probate.

Option 3. Transfer title from joint tenancy to tenancy in common, but then dad transfers his share to the husband and wife, who then transfer 100% to their living trust.

The first step in this option is the same as Option 2. There is no change in ownership because it is a proportional transfer. However, when dad then transfers his 1/3 tenancy in common interest to the husband and wife, it would be a change in ownership for his 1/3 share.

PRO. The husband and wife would have 100% title and can transfer 100% of their home to their living trust. They would not have to depend on dad creating his own trust.

CON. Dad's transfer of his 1/3 interest will be a change in ownership and trigger a reassessment of his 1/3 interest.

Option 4. Dad moves in and makes the home his primary residence.

The remaining parent-to-child exclusion under Proposition 19 is if a parent transfers his interest in his primary residence to a child and the child makes the property his primary residence. 

If dad moves in and makes the home his primary residence, then when he transfers his 1/3 interest to the husband and wife, the transfer will fall under the parent-child exclusion and will not be reassessed.

PRO. If Dad moves in and then transfers his interest to his son and daughter-in-law, the property tax will not increase.

CON. Dad has to move in with his son and daughter-in-law. 

Options 1-3 will eventually result in a change in ownership for Dad's 1/3 interest. 

If the home was only purchased recently, then a reassessment of Dad's 1/3 interest is no big deal because the home's value will not have increased very much, so the property tax increase will be minimal.

However, if the husband, wife, and dad purchased the home many years ago, and the home value has significantly increased, then Option 1 might be the best choice because it will delay the reassessment. But for Option 1 to work, dad has to die first. And even then, his 1/3 interest will eventually be reassessed.

If the husband and wife think they will remain in the home for a long time, it might be worthwhile to take the hit on the reassessment of dad's 1/3 interest now, at today's reassessment value, rather than many years later when the reassessment could be much higher. As we know, California real property doesn't typically decrease in value.

This article has discussed the problems with owning your home in joint tenancy with a parent and the options for removing your parent from the title. But if you haven't bought your home yet, and you need your mom or dad on the title to get the loan, I recommend you take the title as tenants in common. Then you can avoid the joint tenancy rules. You can transfer your interest to your living trust, and at some point, sooner than later, your mom or dad can transfer their interest to you and your living trust.