California law provides a variety of ways to transfer real property. The instrument used to transfer real property in California is a property deed. Since there are several different types of property deeds that can be used to transfer real property in California, it is important to understand the purpose and effect of each type of deed. Read on to learn more about the various options available, which deed may be required, how documentary taxes are assessed, and how you may be able to reduce or eliminate the amount of documentary transfer taxes paid.
What is a Deed?
Transferring title to real estate is a straightforward process accomplished with a legal instrument known as a “deed.” The first consideration is to decide which deed should be used for the title transfer. There are different names that have been given to deeds over the years. For example, you may have heard someone make reference to a grant deed, a warranty deed, a quitclaim deed, a gift deed, or a fiduciary deed. Each of these property deeds fall under two main categories of California deeds and share certain similarities. Each deed also has its own unique purpose. Although still used in other states, the warranty deed is not used in the transfer of real property in California, and has been replaced by the grant deed.
Deeds Used For Transfer of Real Property in California
There are two types of deeds used in California to change ownership of real property; a “grant deed” and a “quitclaim deed.” As mentioned earlier, you probably have come across other deeds such as warranty deed, interspousal deed, or trust transfer deed. These are just special names given to grant deeds or quitclaim deeds based on the circumstances of why the deed is being executed. For example, an interspousal deed is a type of grant deed used between spouses in a divorce or to add a spouse’s name after marriage. The following information will clarify some technical issues surrounding the transfer of real property in California, including common names for California deeds, and how each are typically used:
- Grant Deed – A grant deed transfers an owner’s interest in the property and can show what percentage of interest is being transferred. A California grant deed assures the buyer/grantee that they are receiving valid title to the property, that the title has not been conveyed to someone else, and that there are no hidden owners or easements. A grant deed can be used when property is being sold from one person to another, or to transfer real property into a living trust.
- Quitclaim Deed – A quitclaim deed can be used for the transfer of real property in California of an unrecorded or recorded interest from a grantor to a grantee. The grantor may only have a “potential” interest in the property which means they may or may not be named on an earlier recorded deed. The transfer is made from the grantor to the grantee without any warranties or guarantees. A quitclaim deed is often used to release a person’s unrecorded interest in real property, to clear a cloud affecting title to the property, or to release one spouse’s interest in real property to the other spouse. A quitclaim deed is not usually used when transferring ownership between two people if there is an exchange of money or sale of property.
- Gift Deed – A gift deed is a special type of grant deed that “gifts” ownership of real property interest to another person or entity. This deed is different from a standard quitclaim deed or grant deed in that the gift deed specifically designates that the transfer was not subject to a sale, and there was no monetary compensation received by the grantor. The person receiving the gifted ownership of the property is required to report receiving the gift on their federal income tax return.
- Fiduciary Deed – This is a special type of grant deed executed by a person who has been appointed or selected as a fiduciary for someone else. An example of a fiduciary would be a trustee, guardian, conservator, or similar person. As a fiduciary, they are authorized to sign and transfer interest in real property owned by the party for whom they are acting in a fiduciary capacity.
- Transfer-on-Death Deed –Effective January 1, 2016, California’s new transfer-on-death deed, or beneficiary deed, allows an owner of real property to execute a deed that names a beneficiary who will be granted title to the property at the owner’s death without going through probate. No transfer of ownership actually takes place until after the owner is deceased. The use of a transfer-on-death deed is limited and is not available for all types of property. It is revocable and an owner can execute and record several transfer-on-death deeds during their ownership of real property. The last recorded deed will be the one in effect.
Once the proper deed form has been selected, a decision will need to be made about the form of title to be held by the new property owners. The most common ways to hold title to real property is as a sole owner, tenants-in-common with other owners, a trustee of a trust, joint tenants, community property, or as community property with the right of survivorship. This important topic is discussed in greater detail in another article on our website.
What is Documentary Transfer Tax?
When there is a transfer of real property in California, a Documentary Transfer Tax is a tax imposed on each recorded document in which real property is sold. Documentary Transfer Tax is like a “sales tax” due at time of transfer of real property in California, and should not be confused with annual real property taxes. The amount of Documentary Transfer Tax varies greatly based on where the property is located. The Documentary Transfer Tax is based on the value of the interest of real property conveyed. The tax is paid at the time of recording a document transferring real property. The seller or buyer pays the documentary transfer tax. Payment of Documentary Transfer Tax is typically not required for gift deeds or quitclaim deeds if they have been properly prepared.
How is California Real Property Transfer Tax Calculated?
Calculating real property transfer tax is straightforward. At the time of writing this article, most counties charge $1.10 per $1000 value when there is a transfer of real property in California. For example, on real property valued at $20,000, the amount of the county Documentary Tax would be $22.00. Each city, however, assesses additional taxes on real property transfers; and the amount of additional tax will depend on the city or unincorporated area where the property is located. This convenient transfer tax calculator will help approximate the transfer tax based on the sales price and location of real property in California.
California Real Property Transfer Tax Exemptions
When there is a transfer of real Property in California, there are several types of real estate transactions that are exempt from having to pay Documentary Transfer Tax. These exemptions are identified in the State Revenue and Taxation Code Section 11902-11930. Some of the more common exemptions to the transfer tax are:
- Instruments to secure debts
- Transfer of property to government entities
- Transfers incidental to reorganization or adjustments
- Transfers of interests in a continuing partnership or similarly treated entity
- Changes in the method of holding title without a change in proportional ownership
- Transfer incident to foreclosure sale or deed in lieu
- Transfer incident to dissolution of marriage or similar order
- Transfers by gift or death
- Transfers into or out of a trust
A statement explaining the reason for the property tax exemption must appear on the deed at the time of recording. Such exemptions should be kept in mind when structuring transactions to help reduce the transfer tax charged. It is important that the deed be properly prepared to avoid paying unnecessary real property transfer tax when a deed is recorded.
Many title companies no longer help people prepare real property deeds and, as a result, they often refer people to our office for low-cost help. An improperly prepared deed could have severe consequences down the road! If you need to record the transfer of real property in California, contact A People’s Choice for more information. We can help you prepare the necessary real property deeds, along with the required preliminary change of ownership forms, and facilitate recording the new deed with the correct County Recorder’s office for a much lower fee than hiring an attorney.