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The weak link in California real estate --- Lawyers

In some states, an attorney is part of the real property buying and selling process.  It is required by law.  California is not one of those states.  That means people are often buying and selling houses without any legal guidance.  

To make matters worse, the people they are dealing with--realtors, lenders, and title officers--are not allowed to give them legal advice.  As a result, many people are making the biggest purchase of their lives without any legal guidance at all.

I (Elise S. F. Baker, Esq.) am an estate planning attorney.  I help people put their wishes in writing for two primary reasons.  First, they want to make sure their personal matters are handled by someone they trust if they are incapacitated.  Second, they want to avoid probate.  

In California, if someone owns a house that usually means I am helping them put a trust-based plan in place.  One of the main reasons trusts are so popular in California is because our probate process is potentially very expensive.  Trusts are one way to avoid probate as long as the plan is comprehensive, well-crafted, and properly maintained over time.   

In California, there are four basic ways for multiple owners to hold title to real property—tenants in common, joint tenants, community property, and community property with right of survivorship.  Each form of title has different rules that control an individual owner’s ability to transfer his or her share of the property during life and after death, and each transfer has different property and income tax implications.

My goal here is to paint the different forms of title in broad strokes so you can see how important it is to get good advice when you are purchasing property with another person.  Each individual situation is different and proper legal advice can make all the difference when the parties no longer wish to own the property together or when they decide to sell it.  The attached table illustrates the general rules for each form of title on these issues.

Joint Tenancy

Joint tenancy exists when two or more persons are joint and equal owners of the same undivided interest in real property. Joint tenancy requires four things:  1) The owners must acquire their interests at the same time, 2) The owners must all be included on the same deed, 3) The owners are presumed to own the property in equal shares, and 4) Each owner is presumed to have an equal right to use the property.  If any one of these things is missing, the joint tenancy could be invalidated if challenged.

For many, the most important feature of joint tenancy is the right of survivorship. This means that if one tenant dies, the surviving joint tenant(s) acquire the deceased’s interest without a court action such as a probate.

Tenancy in Common

Tenancy in common is when two or more persons are owners of an undivided interest in property.  Each owner may hold an unequal interest; that is, ownership can be divided 64/40 or any way the owners choose.  Even so, each one has an equal right to use the property and is legally obligated to pay his or her share of the expenses, such as property taxes.  Each owner may sell, convey, or encumber his or her interest without the consent of the co-owners.

Unlike joint tenancy, there is no right of survivorship, which means that upon the death of a tenant in common, his or her interest does not automatically pass to the surviving co-tenants. Instead, the deceased owner’s share will go to his or her heirs, or it will go to the beneficiaries of the deceased owner’s will or trust.  This could require a probate proceeding.  The deceased owner’s heirs then take their places along with the other owners as tenants in common.  

Community Property

Community property ownership is another form of ownership held by more than one person. But, in this case, the property can be held only by a husband and wife or by registered domestic partners. Community property is generally defined as all property acquired during a valid marriage or registered domestic partnership. California is a community property state.  Therefore, all California property acquired by a husband and wife or by registered domestic partners during marriage is presumed to be community property.

This is California and it is the law so there are exceptions. For example, all property owned before marriage or registered domestic partnership clearly remains separate property after marriage or registration as long as the property is kept separate.  The same is true of property acquired by an individual through gift or inheritance. If that property is commingled with community property, it could lose its separate property identity.

Each spouse or registered domestic partner has equal management and control of the community property. Both spouses or partners must sign any contracts or documents that convey or encumber real estate that is held as community property.

Each spouse or partner has the right to dispose of his or her half of the community property by will to whomever he or she wishes. But if either spouse or partner dies without a will, then the surviving spouse or partner receives all of the property; the children, if any, could end up with nothing.  The transfer to the surviving spouse or partner might require court proceedings to confirm ownership if the survivor wants to refinance or sell the property later.

Community Property with Right of Survivorship

Community property with right of survivorship means upon the death of one spouse or partner, the surviving spouse or partner receives title to the entire property without the need for a court order.

Married couples and registered domestic partners have a choice. They may hold title simply as community property and keep the right to will their separate interests to other people, or they may hold title with the right of survivorship and guarantee that, upon death of one spouse or partner, the property will go to the surviving spouse or partner without any court proceedings needed.

This choice is not as simple as it may sound because of the federal tax laws that are affected by the form of title when determining estate tax liability.  This is an area of law that has seen many changes lately.

Community property does not need to be probated if the deceased spouse or partner leaves his or her interest to the surviving spouse or partner, but it might require a court order to confirm the surviving partner’s interest if the survivor wants to refinance or sell the property. If the deceased spouse’s or partner’s interest is left to someone other than the surviving spouse or partner, there may be no way to avoid probate.

Other Considerations

Loans.  As a general rule, regardless of the form of title, any individual owner that is obligated on a loan secured by the property remains obligated on that loan even if he or she transfers his or her share of the property to another person.  

In addition, the property remains security for the loan, which means the lender can foreclose on the property even if the obligated person is no longer on the deed.  I have long conversations about this with my clients who want to give the family home to their children when there is still debt on the property.  That debt becomes due in full when the obligated person dies.  If the estate cannot pay the debt and the children cannot pay the debt in full, the lender can foreclose on the property.

Property Taxes.  As for property tax, the general rule is that the property tax will be reassessed every time property is sold or transferred to a new owner.  This usually results in increased property taxes for the new owner.  Some transfers are exempt from this rule.  

A seller’s income tax basis is usually the price he or she paid for the property when it was purchased.  Each new owner gets an increased, or stepped up, income tax basis.  The seller pays taxes on the amount they gained on the sale.  For example, if I purchase a house for $100,000.00 and sell it for $500,000.00, then I am looking at a potential taxable gain of $400,000.00.  Of course, in the world of taxes, it is not quite that simple and a real estate tax expert should be consulted.

Gift Taxes.  If the property is given away rather than sold, there may be gift tax implications.  Gift tax is paid by the giver not the receiver.  This becomes particularly important if you are giving property to someone other than a federally recognized spouse or if your spouse is not a United States citizen.  There are also annual and lifetime limits on tax-free gifting.  Again, if this is a potential issue, a gift tax expert should be consulted.