Co-Ownership Property Rights in California, Joint Tenancy & Tenancy In Common.

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In California, there are numerous ways for co-owners to hold title to real estate. Options include tenancy in common, joint tenancy, community property and community property with right of survivorship. One of the most significant differences between the various ways of holding title is the right of survivorship. This is the right of one tenant to receive the ownership interest of a co-tenant upon the co-tenant's death.

How a Tenancy in Common Works

In California, absent language to the contrary, the law presumes a tenancy in common. In a tenancy in common, one tenant does not have the right to receive a cotenant's interest upon death. A tenant who dies can leave his share to any beneficiary in a will or trust. The share of a tenant who lacks a will or trust is likely to pass to an heir through intestate succession. The share may be subject to probate. Probate can cost between 4 percent to 7 percent of an estate’s value and can take a considerable amount of time.

Before death, cotenants can share a property unequally. For example, one tenant can own 70 percent of the property and the other can own 30 percent. Tenancy in common allows for different arrangements than community property.

Tenancies in common have become more common in California cities where real estate prices are extremely high, such as San Francisco and Los Angeles. Typically, a buyer purchases a share of the real property and signs a private tenancy-in-common agreement. This agreement gives him an exclusive right to his unit. Every buyer has his own loan, but shares the property tax with other co-owners. Co-owners do not have to get city approval to subdivide their property.

Joint Tenancy’s Weakness

Two or more parties can also own property as joint tenants. Each joint tenant has a right of survivorship. When one party dies, the other owners receive his share of the property. The remaining cotenants take the deceased's share in equal measures. The right of survivorship in a joint tenancy supersedes language in a will or trust regarding disposition of the property. A joint tenancy is not subject to probate.

A joint tenancy is subject to capital gains tax. The surviving joint tenant cannot avoid the capital gains tax on the value of the property. Only the deceased owner’s share of the property receives a stepped-up cost basis to fair market value. If the surviving owner sells the property, one-half of the appreciation that accrued between the time the property was purchased and the date of the first owner’s death will be taxed as gain. As of March 2020, the IRS allows a qualified individual to exclude from taxable income up to $250,000 of the capital gain from the sale of a home.

Read More: Difference Between Community Property With Rights of Survivorship vs. Joint Tenancy

Community Property for Domestic Partners and Spouses

With community property ownership, each party has the right to half of the property. Each can leave the property to a beneficiary in her will. Community property is a common form of title held by married spouses and domestic partners. According to the California Civil Code, all property acquired by either party during the course of a marriage or domestic partnership is community property. There are some exceptions, such as property inherited from a dead relative. In community property, both parties have the right to one-half of the property. Each party can leave her interest in the property to a beneficiary in a will or trust.

Community Property With Right of Survivorship

In community property with right of survivorship, a spouse or domestic partner’s interest passes to their surviving spouse or domestic partner upon death. Community property with right of survivorship is an option for a married couple or domestic partners. This form of holding title combines the tax features of community property with the right of survivorship of joint tenancy. Upon one spouse or domestic partner’s death, the surviving individual receives the deceased party’s interest in the property. Federal and California law provide a stepped-up basis for both halves of the property. This lowers the amount of capital gains tax the surviving spouse or domestic partner must pay.

A Mathematical Example of the Advantage

A mathematical example shows why community property with right of survivorship is preferable to joint tenancy:

Say a married couple holds property they purchased for $50,000 as joint tenants. The property is now worth $500,000. Each spouse has an original basis of $25,000 in their one-half of the property. When one spouse dies, the other receives a stepped-up basis on the one-half of the property that the deceased spouse used to own. As a result, one-half of the property would have a basis of $250,000, the stepped-up basis, and one-half of the property would have a basis of $25,000, the original purchase basis.

Now say the couple held the home as community property with right of survivorship. Using the same home purchase price and values, the surviving spouse would have a new basis of $500,000.

How to Perfect Title

A party who seeks to leave property to a beneficiary should establish perfect title. Perfect title is title that is good and valid, clear of any liens or legal questions. An imperfect title may be burdened with an easement, a right to cross over or use the land. Perfect title is more marketable than imperfect title.

It is important for joint tenants, spouses and domestic partners to establish perfect title in the property that they hold together. In a joint tenancy, the surviving tenant must record an Affidavit of Joint Tenant. With property held as community property or community property with right of survivorship, the surviving spouse or domestic partner will need to record an Affidavit of Death of Spouse or Domestic Partner.

Terminating a Right of Survivorship

An individual or couple who wants to terminate an existing right of survivorship must do so before one of the parties dies. There are several ways to terminate a right of survivorship. A party can record a written declaration terminating the right. A recorded deed from one spouse or domestic partner that names that party as grantor and grantee also terminates the right of survivorship. Spouses and domestic partners can mutually agree to terminate the right of survivorship in a written document.

Understanding Tax Implications

Parties who co-own or plan to co-own property should talk to a probate attorney, accountant or estate planner. There are other options for holding title, such as a living trust or intervivos trust, which offer additional flexibility. It keeps distribution of assets private. It is a good choice for a spouse or a domestic partner with children from a previous marriage.

A co-owner of real or personal property should be aware of the appreciation or depreciation of her asset over time. Generally, and particularly in California, real property tends to accumulate value over time. Yet a parcel of real property can also lose value. It can get damaged by flooding, pollution, erosion, earthquakes or fire.

Options like tenancy in common and joint tenancy have significant downsides, from probate to a capital gains disadvantage. Co-owners may choose to avoid these concerns through marriage or registration of a domestic partnership.