California has enacted a new statutory exclusion from change in ownership for local tax assessments that protects certain cotenants (co-owners) from reassessment at the death of a cotenant.  Real property that has been held for a long time is often taxed at a lower value than it would be if its value were reassessed to its current value.   Let us examine the new exclusion, how it fits in with other exclusions, and what it all means

          The new exclusion — applicable at the death of a cotenant — protects two cotenants who together own 100% of the property, either as tenants in common or as joint tenants provided all the following additional conditions also apply:  (1) both cotenants must be owners of record for the 1 year period preceding the death; (2) the property must have been the principal residence of both cotenants for the same 1 year period; (3) the surviving tenant must obtain 100% ownership at the death of the other cotenant; and (4) the surviving cotenant must sign an affidavit that he/she continuously resided at the residence as his/her principal residence for the 1 year period preceding the other cotenant’s death.

          The foregoing exclusion is clearly most relevant to unmarried persons living together who are not registered domestic partners.  It also has some application to some siblings who live at home together.

          The new co-tenancy exclusion has overlap with the existing joint tenancy exclusion rules that apply at the death of a joint tenant in the following situations:  (1) where the joint tenancy was created by transferring ownership from the same persons as tenants in common to themselves as joint tenants; and (2) where a spouse or registered domestic partner of an existing joint tenant was added to the joint tenancy; provided that the original joint tenant (whose spouse or partner was added) also remained on title as a joint tenant. 

          The foregoing joint tenancy exclusions are useful for a wider variety of transfers than the new exclusion (although there is overlap) to which the frequently used inter-spousal exclusion, the parent to child exclusion or the narrower grand-parent to grand-child exclusion do not apply. 

          Both rules have application to certain real property transfers between siblings, between aunts & uncles and nieces & nephews, between co-habiting unmarried persons (who are not registered domestic partners), and between other co-owners who are not married to each other. 

          Let us illustrate each of the foregoing exclusions from reassessment using hypothetical examples.

          First, consider two siblings who inherit their parents’ home as tenants in common of record and who each continue to reside together at the home.  The new co-tenancy exclusion would apply when the first sibling dies provided they had each lived at the residence for the 1 year period immediately preceding the first sibling’s death.  Then, if the surviving sibling was married or had child and later dies leaving the residence to these persons, the interspousal or parent-child exclusions apply, as relevant.

          Second, take the same hypothetical but now say that one sibling does not reside there for the required period.  In that case, if the siblings transfer title from themselves as cotenants in common to themselves as joint tenants – perhaps adding their respective spouses and/or registered domestic partners as joint tenants — then the death of the first joint tenant will not trigger a reassessment.  That however, also means that the surviving joint tenant(s) inherit(s) complete ownership of the residence.  Clearly that is not the typical result desired by most persons involved that type of co-ownership situation who usually want to leave their share to their children.

          The foregoing rules each have their own nuances that are beyond the scope of this article.  Before proceeding to rely on any exclusion consult with a qualified advisor.

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