There are different ways to title property. They all impact the rights of those involved and, depending on the property, can have massive financial consequences. You need to consider how to title the property because it’s not just a technicality.
Here are the three main ways you and the other person can own property:
- Tenants in Common (TIC)
If you and the other party aren’t related, this may be your best choice. All parties jointly share the costs and benefits depending on their percentage of ownership, which need not be equal. Although you may own a much smaller share of the property, other tenants in common can’t exclude your use or possession of the property. Unless everyone agrees to the contrary, each owner can transfer their interest in any manner (such as by a gift, through a will or trust, or sale).
- Joint Tenancy (JT)
This is the most common way married couples and or family members jointly hold title. Like a TIC, joint owners share the costs and benefits based on their ownership share. Unlike a TIC, all the parties have equal ownership.
A JT includes a “right of survivorship.” If one co-owner dies, surviving co-owners get equal ownership of the whole. Suppose the property is held in JT by two spouses after one dies. In that case, the other becomes the sole owner through the operation of law, not the probate process (though you must record a death certificate with the County Recorder’s office).
Like a TIC, one JT owner may transfer their ownership during their life or afterward through a will. If this happens, ownership’s no longer a JT but becomes a TIC. This may cause property and income tax issues for both the old and new owners. One JT owner can’t transfer their ownership through a will. When the person dies, their share passes to the surviving owner(s).
- Community Property with Right of Survivorship (CP)
CP is almost the same as JT. The parties have the right of survivorship and equal ownership. Ownership can’t pass through a will, and when one owner dies, it passes through the operation of law – not the probate process. A CP is only for married couples, while JT owners may be unrelated. There are tax advantages if CP is used that are unavailable to JT owners.
Property Tax Considerations
The state assesses real property taxes each year at 1% of the property’s tax basis (its fair market value when it was acquired). The property’s reassessed, and the basis changes annually. Any tax basis increase is limited to no more than 2% if there’s no change in ownership. The basis should reflect the property’s current fair market value if there is.
State law is complex as to what is or isn’t an ownership change. Remodeling the property may trigger an ownership change, while a transfer between parents and children may not. The fair market value could significantly increase the tax basis when this change happens. This can cause a substantial increase in property taxes.
The title form can trigger a reassessment exemption. For married couples, no matter how the property’s owned, there will be no reassessment when ownership changes involve spouses, whether that happens during their lives or due to survivorship rights after one passes away
If you’re not married, transfer after the death of a JT or TIC owner may not cause a reassessment if there are two co-owners, the survivor gets 100% ownership, the property was jointly owned and used by both as their primary residence for at least one year before the co-owner’s death
Income Tax Issues
How you earn money, and how much impact your taxes. You can generate income from many sources. Another factor can be if you own property through a CP, not a JT, which may give you income tax benefits.
With a JT, the surviving spouse receives the other’s ownership share. They benefit from a stepped-up tax basis on that half-share only. The survivor’s tax basis in their original half-share stays unchanged.
When the property has CP ownership, a surviving spouse benefits from a stepped-up basis as to the entire property. The tax basis is the property’s fair market value at the time of death. You need to consult with a CPA or tax lawyer to determine how this may apply to you, but, usually, a stepped-up basis in the entire property, not just half, can be beneficial for the surviving spouse.
We’re Here to Help
If you’re buying a property with another or want to change the title of the property you currently own, we can answer your questions and get you through the process. To get a free consultation, call Anthony Burton at (949) 244-4207 or complete our online contact form today.
