Partition Actions: Types of Tenancy
In order to understand the likely result of a partition action, you need to know the kinds of ownership recognized by California law. A partition action is never the best-case scenario, so this short guide is meant to help you avoid a lawsuit! For more on partition actions, see our previous post here.
California real estate law recognizes several types of property ownership. The most common are joint tenancy, tenancy in common, and community property. California also recognizes partnership, a form of real estate ownership for business purposes, but we will focus only on forms of personal tenancy in this post.
Joint tenancy or joint tenancy with right of survivorship (JTWROS) means that the joint tenants each hold the right to possess the entire property and each has the same property interest. Joint tenancy must be explicitly established in the language of the deed, and they must take the title to the property at the same time. Joint tenancy includes a special “right of survivorship,” meaning that upon the death of one joint tenant, the tenant’s interest in the property is automatically divided evenly between existing joint tenants. Legally, joint tenancy means that the title changes instantly at the moment of death, and therefore never enters probate, is never part of the deceased’s estate, and cannot be willed away to another heir.
This can provide significant advantages at the state level, but note that the IRS does not recognize joint tenancy’s magical abilities. For federal tax purposes, if the joint tenants are unmarried, the IRS sees the share of the property attributed to the deceased’s estate as equal to the percentage of the purchase price contributed by the deceased, and in the event that there is no evidence establishing this percentage, the IRS will presume that 100% of the property is attributed to the deceased’s estate. If the tenants are married, the IRS will presume that each tenant owns half the property, but only the deceased’s half will receive a “step-up” or “step-down” in cost basis to the current market value, meaning that appreciation on the surviving spouse’s half may result in significant tax liability when the property is sold. The tax implications of joint tenancy can thus be complex and costly.
Furthermore, if a joint tenant’s interest in the property is sold or transferred while the tenant is alive, the share automatically converts to tenancy in common, eliminating the right of survivorship.
Tenancy in common also means that the tenants also have the right to possess the entire property; however, unlike joint tenancy, if one tenant-in-common dies, that interest does not automatically pass to the surviving tenants-in-common. In the absence of specific language in the deed, California law presumes tenancy in common as the default form of ownership. In this case, the share of the deceased tenant passes to his or her heir(s).
Because California is a Community Property state, property can also be owned as community property. Community property is a form of ownership uniquely available to married couples or domestic partners, and in regards to real estate, it in some ways combines the advantages of joint tenancy and tenancy in common. Like tenancy in common, each spouse or partner holds a 50% share of the property, but like joint tenancy, in the event of death, the spouse or partner receives ownership of all community property unless otherwise disposed of in the deceased’s will.
Note on spouses vs. partners: For federal purposes, spouses receive tax benefits from this form of property that domestic partners do not. The deceased’s 50% interest in the property is attributed to the deceased’s estate, but the surviving spouse is allowed to “step up” 100% of the value basis of the property to its fair market value at the time of the deceased spouse’s death for capital gains tax purposes (as opposed to the 50% under joint tenancy). This allows the spouse to potentially avoid some or all tax liability by excluding the property’s appreciation during the deceased’s lifetime. However, because the federal government does not recognize domestic partnerships, domestic partners will only receive the benefits of community property under California law and not for federal tax purposes.
In 2001, California created a new form of community property called community property with right of survivorship (CPWROS). Instead of the deceased’s 50% of the property being attributed to the deceased’s estate, this enhanced form of community property allows the deceased’s interest in the property to bypass probate and immediately pass to the surviving spouse, just like in joint tenancy, while retaining the benefits of community property. This form of ownership provides the best of both worlds, and it is likely to be the most advantageous for married couples without a living trust.
Note that California is one of nine Community Property states, while most states follow common law definitions of property ownership. Therefore, if a person’s estate involves property in other states, you may see tenancy by entirety, a common law analogue to community property with right of survivorship, but there are some important difference to be aware of.
In California, the ownership of property does not need to be of just one form: interest in a property might be a mix of tenancy types. For example, two spouses may own a property under joint tenancy. They decide to add their three children to the title. Since the children are added after the joint tenants, the children cannot be joint tenants with their parents, but they can be added as tenants-in-common, or, if the three children are added to the title together, they could become joint tenants with respect to each other, but not with respect to their parents.
It is also important to realize that a joint tenancy can be dissolved at any time without the consent or even knowledge of the other joint tenants. This is called alienating the tenant’s share: the tenant destroys the joint tenancy relationship and the tenants become tenants in common with respect to each other.