One of the decisions that you will be asked to make as you are completing the purchase of real property in California, is how you are going to hold title to the property (the vesting). The vesting will appear on the Deed of Trust and the Grant Deed, which are recorded documents in the county where the property is located such as Los Angeles County, San Bernardino County, Orange County or Riverside County. Usually, your escrow officer or lender, or possibly both, will ask you how you want to hold title. The manner in which you hold title may have significant legal and tax consequences. Some of the issues that you should consider will be explored in this blog.

SOLE OWNERSHIP

Real property in California can be owned in either Sole Ownership or in Co-Ownership. There are three options for holding property as a Sole Owner:

A Single Man or Woman, defined as a man or woman who has never been married.

An Unmarried Man or Woman, defined as a man or woman who has been married in the past, but is now legally divorced or is widowed.

A Married Man/Woman, as His/Her Sole and Separate Property, defined as a married man or woman who wishes to acquire title in his or her name alone.

In California, any assets that are acquired during marriage become community property, (i.e., belonging to both spouses), unless they are specifically acquired as separate property. Real property that is conveyed to a married man or woman is considered community property, unless it is stated otherwise. In order for a married individual to acquire title in his or her name only, the spouse must relinquish all right, title and interest to the property. Usually, this is done by executing a Quitclaim Deed to the property, which is recorded concurrently with the deed to the property.

CO-OWNERSHIP

For residential property, the primary methods for holding title are Community Property, Joint Tenancy, and Tenancy in Common. Tenancy in Partnership will not be addressed in this section.

COMMUNITY PROPERTY

When the title to property is held by a married couple as community property in California, each spouse has equal rights of management and control of the property and the right to include half of the community property in his or her will. If the first spouse dies without a will or leaves the property to the surviving spouse, the property will go to the surviving spouse and no probate is necessary. If a spouse exercises the right to leave one half of the property to someone other than the surviving spouse, that half is subject to administration in the estate.

With California community property, on the death of the first spouse, both spouses’ half interests in the property will get an income tax basis adjustment to fair market value. For example, if the property was purchased for $100,000 and is worth $300,000 at the time of the first spouse’s death, the surviving spouse will get a stepped-up basis to $300,000 for tax purposes.

One issue to be aware of is that when property is purchased with one spouse’s separate property, the separate property becomes community property. For example, suppose John and Mary purchase a house shortly after they are married. Mary provides the $20,000 down-payment from savings she accumulated prior to the marriage. If title to the property is held as community property, the $20,000 becomes community property. In essence, Mary has just given John a gift of 50% of the separate property, or $10,000. Similarly, if Mary’s parents gave her a $20,000 gift to use as the down-payment on the property, these funds would also become community property.

COMMUNITY PROPERTY WITH RIGHT OF SURVIVOR-SHIP

As of July 1, 2001, California law provides for a right of survivorship for a married couple while owning a home or other real estate as community property. This would mean that when one spouse dies, the other spouse will own the home outright just as with joint tenancy (assuming proper filing is done) and receive a “stepped-up basis” (an income tax basis adjustment to fair market value for the entire home) for capital gains tax purposes if it has appreciated in value. The problem with this form is that when the survivor dies, property must then go through probate to get to the beneficiary.

JOINT TENANCY

The primary characteristic of joint tenancy is the right of survivorship. When one joint tenant dies, his/her interest in the property is equally distributed to the remaining joint tenants. The property does not become part of the individual’s estate, so it does not have to go through probate. This means that the transfer of property is easy, but it also means that the individual cannot include the interest in the property in his/her will. It also means that when a married couple own property as joint tenants, it will go through probate when both spouses are deceased; avoiding probate under this circumstance by putting children on title as joint tenants is fraught with many problems.

If unmarried individuals hold title as joint tenants and one owner dies, the property will automatically transfer to the co-owner. As with community property, any separate funds that were used to purchase the property become the property of the surviving owner. Unlike community property, only the decedent’s half interest in the property receives a basis adjustment. Using the example of a property purchased by a married couple for $100,000 which is worth $300,000 when the first spouse dies, the adjusted basis for the surviving spouse would be $200,000 ($150,000 for the decedent’s half, plus $50,000 for the surviving spouse’s half). The problem with this form is that when the survivor dies, property must then go through probate to get to the beneficiary.

TENANCY IN COMMON

Under tenancy in common in California, the co-owners own undivided interests, but unlike joint tenancy, these interests are not necessarily equal. For example, three individuals could hold title jointly, with one person having a 50% interest and each of the other two having a 25% interest. Each co-owner can sell, convey, or mortgage his or her interest without the consent of the co-owners. The new owner simply becomes a tenant-in-common with the other owners. When property is held as tenants-in-common, there is no right of survivorship. So unlike joint tenancy, the disposition of the property can be specified in the owner’s will. The problem with this form is that when the survivor dies, property must then go through probate to get to the beneficiary.

A CALIFORNIA REVOCABLE LIVING TRUST

Both single and married persons may hold title in a California Revocable Living Trust. One of many benefits is probate avoidance upon death. The transfer of ownership to the surviving spouse or to beneficiaries after one’s death is very easily done and with minimal expense.

NEW CALIFORNIA TRANSFER ON DEATH DEED 

There are several ways an owner of real property can direct the transfer of real property when they die. Up until recently, the most common way was through a trust, will or owning the property in joint tenancy with another person or persons. Effective January 1, 2016, there is now a new way California allows real property to be transferred upon a person’s death and avoid probate.

Governor Jerry Brown signed legislation which stablished a procedure to transfer real property upon death through a revocable transfer on death deed. This revocable transfer on death deed is a new simple and inexpensive way to transfer real property to a beneficiary in California. The deed allows a person to leave their real property to a designated person or persons such as a family member, friend, life-long partner or other loved one, without having to set up a living trust.

Criteria For Transfer on Death Deed (TOD Deed)

The new TOD (transfer on death) deed allows an owner of residential real property to name one or more beneficiaries to receive the property when the owner dies, thus bypassing the need to probate the estate. There are some specific criteria, however, that a person should be aware of when considering recording a revocable transfer on death deed.

• The real property must be a single-family home or condominium unit, or a multiple residence of not more than 4 residential dwelling units, or be a single-family residence on no more than 40 acres of agricultural land.
• A revocable TOD deed must be signed and dated before a notary public to be effective and valid.
• The transfer on death deed must be recorded within 60 days or less from the date it is signed.
• The transfer on death deed can be revoked by the transferor at any time.

SUMMARY

Before deciding how to hold title, you should consider your intent and what you want to happen to the property in the event of your death. If you are unsure how to proceed, consult with your attorney or tax adviser.  Rancho Escrow Services has an in-house attorney that is happy to assist our clients on this issue, without any extra charge.