For the privilege of owning land in this great state, we property owners must pay property taxes to the county in which the property is located. As most property owners are aware, Proposition 13 governs how much a homeowner pays in taxes, essentially 1% of the assessed value of the property. This assessed value changes when there is a change in ownership of the property, such as when the property is purchased. If this property is in the Bay Area, then it is highly likely that the assessed value of the property will increase leading to a higher tax bill for the purchaser.
However, a change in ownership can occur when a transfer results in the termination of a joint tenancy, such as when a joint tenant deeds their interest to themselves as a tenant in common. (Revenue & Taxation Code §65(a).) What is a joint tenancy, what does it mean to sever a joint tenancy and just what is a tenancy in common? Allow me to explain.
A tenancy in common and a joint tenancy are two of the four ways that multiple people/entities can hold title to a piece of real estate. The other two ways are a partnership interest and as community property between spouses. (Civil Code § 682.) For our purposes, the most important difference between a joint tenancy and a tenancy in common is that upon the death of one of the joint tenants, the other joint tenant will automatically inherit the deceased joint tenant’s interest in the property. With a tenancy in common, the deceased person’s interest will pass to whomever the decedent designated in a will or through the laws of intestacy (i.e. the laws governing when person dies without a will).
Severing a joint tenancy simply means that the joint tenancy ceases to exist and now the property is held in some other form. The two main ways to sever a joint tenancy are by the joint tenant delivering a grant deed to a 3rd party or by delivering a grant deed to themselves indicating an intent to sever. (Civil Code § 683.2(a)(1) & (2).) In either of these cases, the joint tenant is not obligated to tell the other owners that they have severed the joint tenancy.
In some cases, the severance of the joint tenancy can trigger a reassessment leading to substantially higher tax bill. Some of the ways that this can happen are discussed below.
Transferring a joint tenancy interest into a trust severs the joint tenancy and can trigger a reassessment, unless an exclusion applies. (Civil Code § 683.2; 18 Code of Regulations § 462.040(b)(1); Letter to Assessors No. 2013/044 (Sept. 5, 2013).) This can happen when unmarried parties buy land together, as joint tenants, and one or both of them transfers an interest into trust.
Another way this can happen is when siblings hold property as joint tenants that one of them may have received from a parent. This can happen because their parents granted the children a joint tenancy interest in the property as part of an estate plan. After such a transfer, the parents and the children would then be joint tenants, automatically inheriting additional interest upon the death of each subsequent joint tenant. The death of the parents will not trigger a reassessment. However, if after the death of the parents, one of the siblings decided that she did not want her interest in the property to go to her brother and deeded her joint tenancy interest to herself as a tenant in common, that would trigger a reassessment.
This was the case in Benson v Marin County Assessment Appeals Board (2013) 219 Cal.App.4th 1445. To simplify the facts of the case imagine a traditional family unit: mom, dad, and two boys, Brother 1 and Brother 2. Brother 1 became joint tenants with mom on a piece of property. After mom’s death, Brother 2 received a joint tenancy interest from Brother 1. Brother 2 then executed a grant deed from himself as joint tenant to himself as tenant in common. This severed the joint tenancy and triggered a reassessment. Brother 2 argued that Revenue & Taxation Code § 62(a)(1) states that a transfer that only results in the changing of the method of holding title is not a change of ownership. The appellate court ultimately held that the Assessor could look beyond the confines of Section 62 for guidance and concluded that because none of the original transferors (i.e. mom and dad) remained as part of the transfer in question, there was a change in ownership triggering reassessment.
If I were to speculate, I would imagine that Brother 2 decided he didn’t want Brother 1 to inherit his interest and executed a grant deed to himself, thereby creating a tenancy in common. The takeaway is that any property transfer should involve at least a phone call to an attorney to see if there is anything the transferors should know about. It also demonstrates why individuals should have a comprehensive estate plan so they can afford unnecessary reassessments that further burden their heirs. All of this could have been avoided by using a revocable trust. Upon the death of both mom and dad, the property would pass outside of probate and to the children without triggering reassessment as section 63.1 of the Revenue and Taxation Code excludes from reassessment transfers of real property between parents and children. Furthermore, if the value of the property passing to the children was worth less than $10,860,000 in 2015, it would also pass without any federal estate taxes based on the combination of mom and dad’s estate tax exemption and mom’s ability to use dad’s unused exemption. This would have been a much better outcome for Brother 2 in terms of time, taxes, and last, but not least, attorney’s fees.