Structuring Co-Ownership in California: Legal, Tax, and Title Pitfalls to Avoid

Property Co-Ownership

Co-ownership of real property has become prevalent in California. Co ownership can offer financial benefits when multiple parties split mortgage payments and utilities. Co-ownership may also meet long-term estate planning needs if the goal is to keep certain real property within one’s family. However, issues often arise if certain precautions are not in place to protect individual interests. This article briefly discusses recommended steps co-owners can take to safeguard their property interests under California law.  

Contractual Safeguards & Co-Ownership Agreements

Many disputes arise because parties do not enter into a written agreement outlining their property interests or succession plans. For example, the parties may be close friends or family members, who do not believe a formal written agreement adding someone on title or removing someone from title is necessary. That may result in litigation seeking to partition the real property through a sale, as physically dividing the property is usually impractical. (Priddel v. Shankie (1945) 69 Cal.App.2d 319, 325, internal citations omitted; See also Code Civ. Proc. § 872.010 et seq. (partition).)

Accordingly, we recommend consulting a transactional real estate attorney if you intend to add or remove someone from title at any time to assist you in recording a deed reflecting the change in ownership interest. If the property is held in trust, we recommend consulting an estate planning attorney to amend your trust instrument reflecting the intended change in ownership interest. Finally, it may be beneficial to develop a separate written agreement (or contract) with your co-owner(s) allocating who has access to which portion(s) of the property, who is responsible for costs such as utilities, repairs, and HOA fees,  how decisions will be made (e.g., budgets, capital improvements, refinancing, and sale), default and buyout rights (including a partition waiver consistent with Code Civ. Proc. § 872.710), dispute resolution, and any stipulations regarding renters on the property and rental payments, etc. For tenancies in common, consider a detailed TIC agreement; for multi member ownership entities, consider an LLC operating agreement.

Structuring Title to Match Intent

It is also important to consider the type of co-ownership arrangement you want to establish.  Two or more property owners may take title as tenants in common or as joint tenants with right of survivorship, and married spouses/domestic partners may also use community property or community property with right of survivorship. The means by which you hold title should be reflected in your recorded deed, property agreement, and/or trust instrument.

A tenancy in common is established when two or more people own real property; however, the ownership interests need not be equal. For example, if two married people and one single person decide to co-own a property, the married couple could own a 2/3 interest in the property, while the single owner could hold a 1/3 interest in the property. Two single people can also take title as tenants in common, though their ownership interests may be equal to the financial amount they contribute to the property. (Milian v. De Leon (1986) 181 Cal.App.3d 1185, 1196.) Accordingly, a tenancy in common provides room for flexibility, as each co-owner can acquire title through different means at different times. (In re Horn’s Estate (1951) 102 Cal.App.2d 635, 639.) If one tenant in common grants his or her interest to a new grantee, that new grantee will take title with the other tenants in common. In other words, if one tenant alienates his or her property interest, that will not nullify the tenancy in common as to the other tenants in common. Note: absent an agreement, each tenant in common has an equal right to possess the whole property.

On the other hand, a joint tenancy is established when two or more owners want to take title in equal shares (50/50 ownership interest if two owners; equal fractional shares if more. However, unlike with tenants in common, joint tenants must take title at the same time through the same means. (Schwartzbaugh v. Sampson (1936) 11 Cal.App.2d 451, 453, internal citations omitted.) A benefit of the joint tenancy is that there is a right of survivorship, meaning that upon death of one tenant, the surviving joint tenant(s) automatically acquire their ownership interest. (Id.) The joint tenancy is advantageous to married couples, who intend to keep the property within their own families. California also recognizes “community property with right of survivorship” for spouses/registered domestic partners, which preserves community property tax basis benefits while providing survivorship.

If any joint tenant wishes to sever a joint tenancy and create a tenancy in common, that joint tenant should provide a written declaration (which may be in the form of a deed) evidencing their intent to do so. (Code Civ. Proc. § 683.2(a)) A recorded instrument unilaterally severing the joint tenancy is generally effective when recorded. (See Civ. Code § 683.2(c).)

We recommend consulting an attorney and/or an accountant if you wish to transfer ownership from a tenancy in common to a joint tenancy, as doing so may result in a property tax reassessment. (Benson v. Marin County Assessment Appeals Board (2013) 219 Cal. App. 4th 1445, 1460–1461.) Transfers among co owners can trigger reassessment under Prop 13 unless an exclusion applies (e.g., proportional interest transfers into/out of an entity under Rev. & Tax. Code § 62(a)(2), interspousal transfers under § 63, or parent child/grandparent grandchild exclusions where available). Always evaluate change in ownership rules before retitling.

Financing, Lender Consent & Due-on-Sale Risks

Finally, it is important to consult your mortgage lender/servicer when wishing to transfer title to inform them who will be responsible for the ongoing mortgage payments. Recording a deed with the county recorder’s office will not automatically result in a release of loan obligations (if releasing a co-owner from title) or an incurrence of loan obligations (if adding a co-owner on title). Consequently, it would be prudent to include a provision or release for loan obligations within your written property agreement. Most deeds of trust include a due on sale clause (12 C.F.R. § 1026; 12 U.S.C. § 1701j 3) allowing the lender to accelerate the loan upon a transfer unless an exception applies (e.g., transfer to a spouse or into a borrower’s revocable trust meeting regulatory criteria). Obtain lender consent or confirm an applicable exemption before transferring interests. Also address responsibility for taxes, insurance, and reserves, and whether co owners will personally guarantee any refinance.