A quitclaim deed is sometimes used for transferring a home between spouses, but another option in some states is the interspousal transfer grant deed (“interspousal deed”). It, too, can pass a house between spouses without a sale. The interspousal deed, whose entire purpose is to change the ownership on the title, is the preferred instrument for couples in California.
Traditionally, interspousal conveyances are not subject to gift or transfer taxes. But in 2021 you might ask: What about California’s Proposition 19? Will that trigger a tax reassessment on interspousal transfer grant deeds now? The short answer is no.
First, a Few Words on Prop 19…
This month, Proposition 19 took effect. This is the Home Protection for Seniors, Severely Disabled, Families and Victims of Wildfire or Natural Disasters Act.
Note that under Proposition 13 (effective since 1978), California properties are taxed based not on fair-market value but on assessed value, which caps tax hikes at 2% annually, unless and until the title is transferred by a deed. Proposition 13 has served Californians for decades as a shield against heavy taxation on their rising property valuations. It will continue in effect.
That said, the new Proposition 19 brings several significant changes to property tax. For one thing, under Proposition 19, heirs to family properties must live in them, as primary residences, to keep their low property tax basis. This part went into effect on Feb. 16, 2021, and it impacts California real estate even if it’s held in a qualified personal residence trust (QPRT). It will result in serious tax increases for heirs in California as they face property tax reassessments in the years ahead.
As Proposition 19’s full title indicates, there will be (effective Apr. 1, 2021) property transfer tax relief for people with disabilities or aged 55+, and for people who have suffered from a wildfire or other disaster. Read Proposition 19 here.
A full examination of Proposition 19 is beyond the scope of our present article. But here’s the main thing for spouses to know:
Because spouse-to-spouse conveyances don’t fall under the legal change-of-ownership category, they do not undergo a property tax reassessment. Similarly, transfers of real property between partners in a registered domestic partnership will not require a change-of-ownership reassessment.
Why Couples in California Opt for the Interspousal Deed
In California, interspousal deeds are the preferred form of conveying a house into community property — or to one person in a divorce. First, note that neither party may transfer title to the marital home pending divorce. Once the petition for divorce is filed and the other party served with process, an automatic temporary restraining order bars anyone from conveying the home without the divorce court’s authorization or a written agreement signed by both sides. This goes for all real estate, even if it’s separate property.
Because California is a community property state, there’s a presumption that the value of a home would be equally distributed in divorce. But co-owned property can be transferred in divorce proceedings with the court’s permission. In 2018, in the case of In re Marriage of Kushesh and Kushesh-Kaviani, the California appeals court held that interspousal deeds supply effective language to “transmute” property from community to sole property — averting later challenges on duress grounds.
☛ Important note: Court holdings state general legal rules. Yet factors can vary from case to case. In divorce, be sure there is a lawyer on each side to represent each party’s interests. Work with your lawyer on a comprehensive plan to address the ownership and control of your real estate and all assets.
Another reason an owner may prefer the interspousal deed over the quitclaim is the clarity an interspousal deed provides regarding the mortgage. With an interspousal transfer grant deed, a spouse can transfer an interest in the shared home and be sure that there is no future liability for debts secured by the home.
That said, there are alternative ways of transferring a home with a mortgage, such as one partner using their equity to buy out the other, and having the person who keeps the house refinance it into their own name and mortgage. Or the couple can opt to sell the house to a third party and divide the sale proceeds.
Other Scenarios for the Interspousal Deed
In California, the interspousal grant deed does not trigger a reappraisal. Nor does it constitute a taxable transfer. It can be used, of course, to convey or create interests between co-owning spouses. There are a number of specific scenarios in addition to the ones we have already mentioned. For a few additional examples, the interspousal deed could be used to:
- Distribute property to a current or ex-partner, to conform to a property settlement in a separation or divorce. Some courts might have the couple sign a judgment stating that the house must be conveyed to one partner before the divorce is final. The interspousal deed should be signed before the divorce, so as to qualify for the tax benefits on a conveyance between spouses.
- Protect a lender if a borrower is facing divorce, or free one of the partners from the credit burdens of the other. Remember, before signing anything, be sure a family lawyer is advising you and — to ensure you carry out your fiduciary duty of the highest good faith and fair dealing — that your partner also has representation. You should always have your lawyer advise you regarding any legal paperwork before you agree to sign.
- Transfer the home to or from a trust for a spouse. For example, to transfer the property out of the trust, the interspousal grant deed would name the trustees (the joint title holders), who grant the property to the one named partner as sole and separate property.
- Constitute a formal release of community property by a spouse not named on the title.
On the deed, the conveyor is called the grantor, who grants real property in the named city and county in the state of California. A legal description must appear, and the deed must by dated and signed with an officer such as a notary public. The notary’s certificate verifies only the signer’s identity, and is not attesting to the proper substance of the document.
Interspousal Deeds and Community Property Rules
Interspousal deeds are appropriate for communally owned property. This type of deed would not be used to convey ownership of a home that’s been inherited by only one of the partners. Nor would it be chosen to transfer separate property, owned before the marriage and never commingled.
In California, most homes are community property. A claim of separate property would need evidence that everything one individual put down on the home was sourced from pre-marital assets. If any part of the down payment or mortgage loan was paid from money earned while married, the home is, under California law, communally owned.
For properties owned by partnerships, LLCs, and corporations, different rules cover real property conveyances and their tax ramifications. Consult a California real estate attorney before transferring real property into or out of legal entities.
We offer this article to our readers to share current real estate news and general knowledge related to the transfer of deeds. For case-specific legal advice involving transfers of deeds in California, it is important to forge an attorney-client relationship with a California real estate lawyer.
City and County of San Francisco, Office of the Assessor-Recorder: About Proposition 19 (2020).
The California State Board of Equalization (BOE): Proposition 19.
The California State Board of Equalization (BOE): Change in Ownership FAQ.
In re Marriage of Kushesh and Kushesh-Kaviani (2018), 27 Cal. App. 4th 44.
California Family Code § 721(b).
Photo credit: TienDat Nguyen, via Unsplash.