Your Dad is a Joint Tenant on Your California Home: Now What?

Most of our married clients who don't yet have a living trust own their home in joint tenancy. Transferring title to their living trust is not considered a change in ownership and, therefore, will not increase the property tax.

However, what if the home is titled in joint tenancy with the husband, wife, and a parent? This article will discuss the property tax and probate issues arising from a three-person joint tenancy and provide recommendations.

California Joint Tenancy Rule

The California joint tenancy property tax rules are found in California Board of Equalization Rule 462.040.

The general rule for change in ownership for joint tenancy is found in Rule 462.040(a):

The creation, transfer, or termination of a joint tenancy interest is a change in ownership of the interest transferred.

When the county assessor characterizes a property transfer as a "change in ownership," it will reassess the property, resulting in a property tax increase.

Termination of a joint tenancy will trigger a reassessment.

However, there is an exception to this rule called "the proportionate transfer rule." If, after the title is changed from joint tenancy, the ownership interests remain the same, then no change in ownership.

Here's how the proportionate transfer rule works:  Husband, wife, and dad own the home as joint tenants. They sign and record a deed transferring title from joint tenancy to tenants in common, and now each owns a one-third interest as tenants in common. Tenancy in common is different than joint tenancy, but they still each have a one-third interest. Since their proportional interest remains the same, there is no change in ownership and no increase in property taxes.

Husband, Wife, and Dad as Joint Owners

With this rule in mind, let's return to our situation. The husband and wife's home is owned in joint tenancy by the husband, wife, and the husband's dad. The property is the husband and wife's home, but they needed dad on the title to qualify for the mortgage. The husband and wife made the down payment and are making the mortgage payments. It is their house, but dad is on the title.

Dad would like to be removed from the title, and the husband and wife would like to remove dad from the title. Can it be done without a change in ownership and reassessment? What are their options and the pros and cons of each?

Option 1: Do Nothing.

PRO. Easy. Do nothing. If they leave the title as is, there won't be a change in ownership. And if dad dies first, the husband and wife, by virtue of the joint tenancy, will receive dad's interest. (By definition, joint tenancy means that when one owner dies, the remaining owners get their interest.)

Once dad dies, they can transfer their 100% interest to their living trust. Until then, they can confirm their intent to have their home in their living trust in their Schedule of Trust Property.

CON. When dad dies, there will be a change in ownership for dad's interest, resulting in a reassessment of his one-third interest and an increase in property tax on his one-third interest.

What if the husband and wife die first? Unless dad has created a will or living trust specifically stating that the home must be distributed to the husband and wife's children, then someone else—dad's new wife or his other children could inherit the home. And unless he has a living trust, his interest will be subject to probate.

Option 2. Transfer title from joint tenancy to tenancy in common, then each create living trusts and transfer their interests to their respective living trust.

The husband, wife, and dad record a deed that changes the form of ownership from joint tenancy to tenancy in common. 

PRO. This would be a proportional ownership transfer, so it would not be a change in ownership and would not be subject to reassessment. Then the husband and wife could transfer their two-third interest to their living trust.

CON. Dad would still need to create his own living trust with specific instructions to transfer his one-third interest in the home to the husband and wife. But if he doesn't, his one-third interest could go to his new wife or his other children and be subject to probate.

Option 3. Transfer title from joint tenancy to tenancy in common, but then dad transfers his share to the husband and wife, who then transfer 100% to their living trust.

The first step in this option is the same as Option 2. There is no change in ownership because it is a proportional transfer. However, when dad then transfers his one-third tenancy in common interest to the husband and wife, it would be a change in ownership for his one-third share.

PRO. The husband and wife would have 100% title and can transfer 100% of their home to their living trust. They would not have to depend on dad creating his own trust.

CON. Dad's transfer of his one-third interest will be a change in ownership and trigger a reassessment of his one-third interest.

Option 4. Dad moves in and makes the home his primary residence.

The remaining parent-to-child exclusion under Proposition 19 is if a parent transfers his interest in his primary residence to a child and the child makes the property his primary residence. 

If dad moves in and makes the home his primary residence, then when he transfers his one-third interest to the husband and wife, the transfer will fall under the parent-child exclusion and will not be reassessed.

PRO. If Dad moves in and then transfers his interest to his son and daughter-in-law, the property tax will not increase.

CON. Dad has to move in with his son and daughter-in-law. 

Options 1-3 will eventually result in a change in ownership for Dad's one-third interest. 

But Maybe It Doesn't Matter, If ...

If the home was only purchased recently, then a reassessment of Dad's one-third interest is no big deal because the home's value hasn't increased very much, so the property tax increase will be minimal.

This is only an issue if the home has significantly appreciated since the purchase.

If they purchased the home many years ago, and the home value has doubled in value, then Option 1 might be the best choice because it will delay the reassessment. But for Option 1 to work, dad has to die first. And even then, his one-third interest will eventually be reassessed.

Take the Hit Now and Lock In

If the husband and wife expect to remain in the home for a long time, it might be worthwhile to take the hit on the reassessment of dad's one-third interest now, at today's reassessment value, rather than many years later, when the reassessment could be much higher. As we know, California real property doesn't typically decrease in value.