Joint Tenancy in California Real Estate – Termination of Family Joint Tenancy Can Trigger Reassessment. Pitfalls of Using Them As A Will Substitute

According to the California Legislature, the vast majority of joint tenancies in California are used as a will substitute among family members. In a joint tenancy, the survivor among the title holders “inherits” the property. This is different from holding the property as tenants in common, in which case each party owns a percentage interest in the property; if one passes, their percentage would go to the deceased person’s heirs. Real estate lawyers are reluctant to suggest joint tenancy because of the risks involved (though escrow officers suggest it). A joint tenancy requires a great amount of trust in the co-parties, because any joint tenant may sever the joint tenancy at any time by recording a deed. Thus, John Doe, joint tenant, could deed his interest to himself as John Doe, tenant in common, at any time, and the other owners of the property would never know. The result would be that the parties are no longer joint tenants, but are now tenants in common. Sacramento real estate attorneys commonly see this happen with estranged couples who bought property as joint tenants. One unexpected result of this problem surprised two Marin County brothers in a recent court case, when one brother deeded his interest to himself as tenant in common. This triggered reassessment, and they got hit with a huge tax bill.

In Benson v. Marin County Assessment Appeals Board, Mom was joint tenant with good son. After mom died, good son owned the property outright. He put his ungrateful brother on title as joint tenants. Ten years later Ungrateful severed the joint tenancy by recording a grant deed in which he granted to himself his interest as a tenant in common. The County Assessor felt this triggered the reassessment provisions, the assessed value of the house went up, and the property tax increased an additional $2,683 per year. Ungrateful brought this lawsuit claiming that severing the joint tenancy did not constitute a change in ownership for reassessment purposes, but was merely a change in the way title was held..

Under Proposition 13 real property tax is based on “full cash value,” meaning “the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. Generally, any sale or transfer of property results in a change of ownership.

However, the legislation and regulations carve out some exceptions to the definition of change in ownership, especially for joint tenancies. Joint tenancies and tenancies-in-common create undivided interests in land, with each co-tenant owning a percentage (fractional) interest. Transfer of any fractional interest is a change of ownership, but results in reappraisal ONLY of the percentage interest transferred. This created a concern because, as the fractional interests change ownership, the various County Assessors would be required to keep track of the various interests and their varied assessments. To minimize this accounting nightmare, the Legislature determined that separate accounting would not be required for family joint tenancies, which are the bulk of joint tenancies in California. It is treated as an equivalent to making a will. As there is no change in ownership in making a will, so there should be no such change in creating a family joint tenancy. Change in ownership would occur when the joint tenancy terminated, frequently on the death of the last surviving parent.

The court, looking at this history, concluded that the law required reassessment to occur when a joint tenancy ended, no matter how that happened. Property will be reassessed. This decision brings to light two issues that most folks in a joint tenancy do not consider. First, is that any joint tenant can sever the tenancy at any time. And secondly, that such severance may have unforseen tax consequences.

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