California Joint Tenancy and Property Tax
California's joint ownership rules are complicated and could trigger an increased property tax.
Buying a home in California is difficult. California real estate is very expensive, and then you have to deal with the property tax.
California Property Tax
However, due to Proposition 13, which was passed in 1978, the county assessor cannot raise the property tax by more than 2% per year. The property tax is roughly 1.3% of the assessed value, which is the purchase price plus the appraised costs of improvements.
If you bought a home in 1980 for $100,000, your property tax is probably around $1,300 per year. However, that home may currently be worth $2,000,000. If the property tax was based on current fair market value, the property tax would be about $26,000 per year. Many states set their property tax on the current fair market value. California does not. One of the few tax benefits of California.
California used to go one step further. It would allow you to gift your real properties to your children, and the property tax would not change. Because California real property always goes up in value, it is not unusual to find instances of a home the parents bought for $100,000, now worth $2,000,000, and the kids, who inherited the home, are only paying $1,300 a year for the property tax. This was called the Parent-Child Reassessment Exclusion.
Proposition 19
However, beginning February 16, 2021, Proposition 19 all but eliminated the parent-child reassessment exclusion. The only exclusion remaining is if the parent-to-child transfer is the family home, and one of the children moves into the family home and makes it his or her home.
With this background on California property tax, let's discuss joint ownership with California real property.
Joint Ownership of California Property
Joint ownership takes two forms: Tenancy in common and joint tenancy.
Tenancy in common is more than one owner of the property and each owner has an undivided interest. When a tenant in common dies, his share will go to his heirs according to his living trust or will, or if none, per the California intestate order of succession. If there are three tenants in common, and each owns 1/3. When one dies, the remaining two continue to own 1/3 each, and the deceased owner's share will go to his beneficiaries or heirs.
Joint tenancy is different than tenancy in common. It has a built-in succession plan called rights of survivorship: when a joint tenant dies, the remaining joint tenants receive the deceased joint tenant's share in the property. The last person alive gets it all.
If there are three joint tenants, each owns 1/3. When one dies, the remaining two each own 1/2. When the second one dies, the survivor will own 100%.
General Rule of Tenancy in Common in California
The general rule of tenancy in common under California law is that the creation, transfer, or termination of a tenancy in common interest is a Change in Ownership of the undivided interest transferred. (California Code of Regulations, Rule 462.020)
Exceptions to the Tenancy in Common Rule
The main exceptions to the tenancy in common rule are:
- Partition of the Property Exception
- Transfer from a Tenancy in Common to a Joint Tenancy Exception
- Proportional Ownership Interest Transfer Exception
A transfer to a legal entity which results solely in a change in the method of holding title and in which the proportional ownership interests in the property remain the same after the transfer - such as a transfer to an LLC where the % interests before and after remain the same.
The tenancy in common rule and the exceptions are straightforward. The joint tenancy rules, however, are not. The remainder of this article is about California's peculiar laws regarding joint tenancy and property tax.
Definitions
First, some definitions:
Reassessment - when the county assessor appraises the property to current fair market value and assigns a new property tax. The property tax is roughly 1.3% of the assessed value.
Change in Ownership - when an ownership interest changes in a way that requires a reassessment.
Original Transferor - someone who creates a joint tenancy by transferring an ownership interest to others but remains an owner. To create Original Transferor status, a transaction must occur that either changes title to joint tenancy or adds an additional person to title as one of the joint tenants. The purchase of property as joint tenants does not create original transferor status. Also, eliminating a joint tenant does not create original transferor status in any of the remaining joint tenants.
Other Than Original Transferor - someone who transfers his joint tenancy interest and who is not an Original Transferor.
General Rule of Joint Tenancy in California
The general rule of joint tenancy under California law is that the creation, transfer, or termination of a joint tenancy interest is a Change in Ownership of the interest transferred. (California Code of Regulations, Rule 462.040)
However, only the interest that has changed ownership will be reassessed.
Example 1. My daughter and I own a home as joint tenants. Sometime later, I gift my 50% share to my daughter, and she becomes the sole owner. This terminates the joint tenancy because now she is the only owner.
This is a Change in Ownership of my 50% interest, therefore 50% will be reassessed.
Exceptions to the Joint Tenancy Rule
There are five main exceptions to this general rule:
- Original Transferor Exception
- Spouse of Original Transferor Exception
- Termination of Original Transferor Exception
- Termination of other Than Original Transferor Exception
- Proportional Ownership Interest Transfer Exception
1. Original Transferror Exception
The transfer creates or transfers any joint tenancy interest, and the transferor, or, if more than one, all the transferors, remain as joint tenants. (Rule 462.050(b).
Example 2. A and B purchase a property as joint tenants. A and B transfer the property to A, B, C and D as joint tenants. No Change in Ownership because A and B are Original Transferors and remain as joint tenants.
Example 3. A purchases a property as the sole owner. A transfers the property to A, B, C, and D as joint tenants. No Change in Ownership because A is the Original Transferor and remains as a joint tenant. B, C, and D are Other Than Original Transferors.
A then dies. Because the property is owned in joint tenancy, B, C and D receive A's interest. This is a 100% Change in Ownership because A, the only Original Transferor, has died.
Example 4. A and B purchase a property as joint tenants. A and B transfer the property to B, C, and D as joint tenants. This is a Change in Ownership because all the Original Transferors did not remain joint tenants. A did not remain a joint tenant. Only B remained a joint tenant. The result is that B's 1/3 interest will not be reassessed, but the remaining 2/3 interest will be reassessed.
2. Spouse of Original Transferror Exception
If a spouse of an Original Transferor acquires an interest in the joint tenancy property either during the period that the Original Transferor holds an interest or by means of a transfer from the Original Transferor, the spouse shall also be considered an Original Transferor.
Example 5. A and B acquire property as joint tenants. A and B transfer the property to A, B, C, D, and E, as joint tenants. E is B's wife. No Change in Ownership because A and B are Original Transferors and both remain as joint tenants. E, as B's wife becomes an Original Transferor. C and D are Other Than Original Transferors.
Example 6. A transfers the property to A and B as joint tenants. No Change in Ownership. A is the Original Transferer and remains a joint tenant. B is an Other Than Original Transferor.
A and B then transfer the property to A, B and C. C is A's spouse. C becomes an Original Transferor because he is married to A, who is an Original Transferor, and he acquired his interest while A was an Original Transferor. B also becomes an Original Transferor because he is a transferor who remains a joint tenant.
Example 7. A transfers the property to A and B as joint tenants. No Change in Ownership. A is the Original Transferer and remains a joint tenant. B is an Other Than Original Transferor.
A and B then transfer the property to B and C as joint tenants. C is A's husband. Not a Change in Ownership. C becomes an Original Transferor because he acquired his interest by a transfer from A, his wife, who is the Original Transferor. B becomes an Original Transferor because he is a transferor who remains a joint tenant.
3. Termination of Original Transferor's Interest
There is no Change in Ownership when the interest of an Original Transferor terminates so long as the terminated interest vests in whole or in part with the remaining Original Transferor(s). But when the interest of the last Original Transferor terminates, there will be a 100% Change in Ownership.
Example 8. A transfers property to A and B, as joint tenants. No Change in Ownership. A is the Original Transferor. B is an Other Than Original Transferor.
A and B then transfer the property to B and C as joint tenants. B does not become an Original Transferor because A does not remain a joint tenant. Therefore, there is no remaining Original Transferor, which results in a 100% Change in Ownership.
Example 9. A and B transfer property to A, B, C, and D as joint tenants. No Change in Ownership. A and B are Original Transferors. C and D are Other Than Original Transferors.
A dies or transfers his interest to B, C, and D. No Change in Ownership because B, as an Original Transferor, remains a joint tenant.
B then dies or transfers his interest to C and D. 100% Change in Ownership because B was the last Original Transferor.
4. Termination of Other Than Original Transferor's Interest Exception
When an Other Than Original Transferor's interest terminates, and all or a portion of his interest is transferred to a remaining Original Transferor, there is no Change in Ownership.
Example 10. A transfers property to A and B, as joint tenants. No Change in Ownership. A is the Original Transferor. B is an Other Than Original Transferor.
A and B then transfer the property to A and C. No Change in Ownership because A, as the Original Transferor, remains a joint tenant. C is an Other Than Original Transferor.
Example 11. A and B transfer property to A, B, C and D as joint tenants. No Change in Ownership. A and B are the Original Transferors and C and D are Other Than Original Transferors.
A dies or transfers her interest to B, C and D. No Change in Ownership because B, an Original Transferor, remains a joint tenant
C, who is an Other Than Original Owner, transfers his share to B and D. No Change in Ownership because B is an Original Transferor.
5. Proportional Ownership Interest Transfer Exception
There is no Change in Ownership if the transfer is between co-owners that 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 a joint tenancy and creating a tenancy in common of equal interests.
- A transfer from a tenancy in common to a joint tenancy (See Tenancy in Common Rule above.)
As you can see, this is complicated.
Most joint tenancy transfers are between parents and children. Before Proposition 19, these transfers would not result in a Change in Ownership because they fell under the parent-child reassessment exclusion. However, Proposition 19 has done away with the parent-child reassessment exclusion for all properties except the family residence. As a result, it is important to understand these rules if you are transferring joint tenancy interests, especially on a property with a low assessed value.