California is one of only nine community property states. This gives married couples in California several choices about how to hold title to California real estate. Like anyone else, married couples may hold title as joint tenants with right of survivorship or as tenants in common. But most married couples prefer to hold title as community property.
Advantages of Holding Title as Community Property
Holding property as community property has several advantages. Community property states treat the spouses as a single economic unit. As long as the property is acquired during a valid marriage and the property is not separate property (discussed below), it is treated as owned by both spouses. Both spouses have equal rights to the control and management of the property, and one spouse cannot transfer the property without the consent of the other spouse. This often matches the intent of the spouses.
These benefits are even more favorable if the property is titled as community property with right of survivorship. The right of survivorship means that the property passes automatically to the surviving spouse on the first spouse’s death. Because title transfers automatically, there is no need to involve the property in a probate proceeding. This makes community property with right of survivorship a great technique for avoiding California probate of real estate.
Community property also provides opportunities for tax planning that are not available for other form of property. As discussed in our article on community property and taxes, community property is entitled to a full “step up” in basis on the death of the first spouse. This rule effectively eliminates all appreciation in community property that occurred prior to the first spouse’s death. This can save taxes when the property is sold by either the surviving spouse or other family members.
Exception for Separate Property
As mentioned above, all property that a married couple acquires during their marriage is community property unless it is characterized as separate property. This means that property is characterized as community property by default unless if fits within the definition of separate property. Section 770 of the California Family Code creates three specific categories of separate property:
- All property owned by the person before marriage.
- All property acquired by the person after marriage by gift, bequest, devise, or descent.
- The proceeds (rents, issues, and profits) from the property described in the first two categories.
If property fits within any of these categories, it is not community property. The spouse that owns the property may deal with the property without the consent of the other spouse.
Note: Things can get tricky if community property is spent on separate property. Say that a married couple uses funds from their jointly owned (community property) bank account to remodel a house that is the wife’s separate property. This creates mixed ownership. The value of the house that is attributable to the marital funds to remodel it is community property; the rest is separate property. This characterization applies even if the deed says that the property is separate property.
It is always difficult to clearly define which portion of the house is community property and which is separate property. To avoid this confusion, it is usually best to avoid spending community property funds on one spouse’s separate property.
Taking Title as Separate Property
If real estate qualifies as separate property, a married individual may take title in his or her name alone. The deed should recite that the property belongs to that spouse as separate property. Although not a strict legal requirement, it is best practice for both spouses to also sign a Separate Property Agreement. A Separate Property Agreement makes it clear that both spouses agree that the property is one spouse’s separate property. This provides assurance to third parties—like banks and title companies—and can prevent future title issues.
Converting Separate Property to Community Property
Some spouses may wish to convert property to community property. This can happen when one spouse holds title as separate property and wants to convert it to community property that is jointly owned by both spouses. It can also occur when both spouses hold title as joint tenants with right of survivorship, but prefer to hold title as community property in order to take advantage of the benefits described above.
The best way to convert non-community property to community property is to sign a new deed that transfers the property to both spouses as community property. The deed may also specify that the property is to be held as community property with right of survivorship.
Community Property and California Transfer-On-Death Deeds
When community property is held with right of survivorship, the form of ownership may conflict with the terms of a Transfer-On-Death Deed. To resolve this conflict, the California Revocable Transfer-On-Death Deed law provides that the survivorship rights will trump the beneficiary designation in the Transfer-On-Death Deed. See our discussion of California Revocable Transfer-On-Death Deed forms for more information about California Transfer-On-Death Deeds.
Application to Registered Domestic Partners
California’s community property laws also apply to domestic partners that have registered with the state. Historically, the registered domestic partner rules have been used to grant community property benefits to same-sex couples who could not marry under California law. It remains to be seen whether the registered domestic partner rules will become antiquated now that the Supreme Court has held that the fundamental right to marry is protected by the United States Constitution.