What are the tax implications when one co-owner sells to another (Rev. & Tax. Code § 62)? 

5242023-300x300There are two common ways an individual can own property: (1) as a tenant in common or (2) as a joint tenant. In California, there is a presumption that the co-owners of a piece of property are tenants in common unless the deed expressly states that the co-owners are joint tenants. 

In a joint tenancy, there is a right of survivorship, meaning that when one joint tenant dies, the surviving joint tenant inherits the other joint tenant’s interest in the property. There is no right of survivorship in a tenancy in common. In certain circumstances, different rules or laws apply when a property is held in a joint tenancy versus a tenancy in common. For example, there are certain laws for property taxes that apply for a tenancy in common that is different from a joint tenancy. 

At the Underwood Law Firm, our attorneys are more than familiar with property taxes and the requirements that follow. This area of law can be complex and entangled in technicalities. Our attorneys are here to walk you through the law step-by-step so that you are not lost in the maze of rules and regulations and to get the best possible results from transferring your property ownership. 

Tax Reassessment

The general rule is that when there is a change in ownership of an interest in real property, there is a tax reassessment as to that interest being transferred. This usually occurs when an interest in the property is being transferred to a third party. Additionally, California courts only apply tenancy in common rules to tenants in common and joint tenancy rules to joint tenants. (Benson v. Marin County Assessment Appeals Bd., (2013) 219 Cal.App.4th 1445, 1460-61.)

Since co-owners in California are considered tenants in common by default, there will be a reassessment unless the transfer falls under one of the exceptions. Many of the exceptions apply to transfers from one cotenant to another cotenant, where in certain instances, this may not be considered a change in ownership, which would not trigger a tax re-assessment. 

Generally, when there is a transfer of a common interest that changes the ownership of the tenancy in common, that portion of the property being transferred is reappraised. (Rev. & Tax Code, 61(e).) However, there are five exceptions where the transfer is not reappraised: 

(1) A transfer of less than 5% of the total value of the property or less than $10,000;  

(2) A partition that results in each cotenant receiving a portion of the property relatively equal to their ownership interest;

(3) Termination or transfer of co-ownership interests between spouses;

(4) Transfers between parents and their children; and

(5) Transfers upon death.

(Rev. & Tax Code, 62(a)(1), 62.3, 63, 65.1(a), 18 CCR 462.160(d)(6), 18 CCR 462.020(b)(1).) 

Under a tenancy in common, if a transfer falls under exceptions (2)-(5), then there is no change in ownership. Under these exceptions, any interspousal transfer, the partition exception, the transfers between parents and their children, and transfers upon death are not considered a change in ownership. In the case of joint tenancies, transfers between cotenants are not usually considered a change in ownership. 

The “Original Transferor” Exception to Change in Ownership

In general, when one joint tenant transfers their interest in the property to the other joint tenant, it is not considered to be a change in ownership. (Rev. & Tax Code, 62(f).) The transferor or transferors involved in this transaction will be considered the “original transferor” or “original transferors” for subsequent transactions. (Rev. & Tax Code, 65(b).) Spouses of original transferors are also considered original transferors. If the joint tenancy interest ends, then the property is reassessed unless the property vests in whole or in part to any remaining original transferors. (Rev. & Tax Code 65(c).) 

After the new joint tenancy interest is created, when a joint tenant who is not the original transferor terminates their interest, there is no reappraisal if that entire interest is transferred to either an original transferor or to all remaining joint tenants. (Rev. & Tax Code 65(d).) This, however, will only work if at least one of the remaining joint tenants is an original transferor. (Rev. & Tax Code 65(d).) 

Essentially, so as long as an original transferor remains a joint tenant, the ownership interests of the joint tenants are not re-assessed when the interests are transferred to other joint tenants. If no original transferors are left, then it is considered a change in ownership, and there will be a tax reassessment. 

An Example

“Shawn” and “Julie” are former romantic partners who bought a house together as joint tenants. After years of couples therapy and working on their relationship, Shawn and Julie decided to call it quits. Shawn still loves Julie and decides he does not want to fight with Julie over the house, so instead, he offers her a proposal. Shawn tells Julie she can have the house as long as she buys out his interest for $100,000. Julie takes Shawn up on his offer. In this example, both Shawn and Julie are considered original transferors. There is no change in ownership because Julie is still a joint tenant, and she is an original transferor, so there is no tax reassessment. 

Later, Julie decides to transfer fifty percent ownership interest of this house to her mother as joint tenants. When Julie transfers part of her interest to her mother as a joint tenant, there is no change in ownership because Julie, as an original transferor, is still a joint tenant. So here, there is still no tax reassessment. 

Julie later decides to transfer her interest to her father so that Julie’s father and mother are joint tenants. Here there is a change of ownership because there are no original transferors left. Neither Shawn nor Julie owns an interest in the property. In this case, there would be a tax reassessment. Keeping track of the chain of transfers is essential in calculating whether there is a tax reassessment or not of the property. 

How Can the Attorneys at Underwood Law Assist You?

In general, a transfer from one joint tenant to another joint tenant is not considered to be considered a change in ownership subject to tax reassessment. This is due to the so-called “original transferor” exception in California law. So long as an original transferor remains a joint tenant, there is no legal change in ownership. This can continue as long as an original transferor remains a joint tenant. 

As each case is unique, litigants would be well-served to seek experienced counsel familiar with the ins and outs of property taxes and the law surrounding them. At the Underwood Law Firm, our knowledgeable attorneys are here to help. If you are seeking to buy out your cotenants’ interest in your property, are worried about whether you are subject to a tax reassessment, or if you just have questions, please do not hesitate to contact our office.

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