For most opposite sex couples, the question of their legal status in California or elsewhere is generally a simple one – they are either married or single*. The question of status is not as clear for same sex couples because there are three distinct legal statuses that a same sex couple may hold. The four different statuses available to same sex couples (coupled but not legally related, CA registered domestic partners, or married) inherently cause confusion, even among the most well-intentioned titling experts, which can be problematic because incorrectly titled real property can create adverse tax liabilities. However, all federally recognized US citizen spouses can change the nature of property from community property to separate property, or vice versa, without income tax consequences although there may be other significant implications.
Registered Domestic Partners
One of the most common statuses for California same sex couples is Registered Domestic Partners (RDPs). This applies to any couple who registered with the State of California on or after January 1, 2000 and who did not “opt out” of the RDP status before January 1, 2005 when AB 205, the California Domestic Partners Rights and Responsibilities Act of 2003, became effective, or who have not subsequently dissolved their relationship.
Pursuant to California Family Code Section 299.2, this title also applies to those same sex couples who entered into a legally recognized relationship in a foreign jurisdiction, whether elsewhere in the United States or in another country, that is “substantially equivalent” to a California domestic partnership. Such “substantially equivalent” relationships include the Civil Unions or Comprehensive Domestic Partnerships provided by state law in Connecticut, the District of Columbia, Oregon, Nevada, New Jersey, and Washington. The limited rights granted to same sex couples in states like Colorado, Hawaii, Maine, Maryland, and Wisconsin are not characterized as “substantially equivalent” and, as a result, a couple who has registered in one of those states but has not subsequently registered with the State of California would not be deemed RDPs under California law.
Married includes all couples either married in California between June 16 and November 4, 2008 or since June 26, 2013. This title is also applicable to couples who were legally and validly married in a foreign jurisdiction, whether in the United States or in another country at any time.
Registered Domestic Partner and Married
Because California law allowed RDPs to marry without first dissolving the registered domestic partnership, many couples who had previously registered with the State as domestic partners have subsequently married and, now hold both statuses. For purposes of property ownership and accumulation of community property, the earlier of the two relationship dates controls.
Once the actual legal status is determined, the second, and most significant, issue is to insure that the subject property is characterized properly as community property with right of survivorship, community property, separate property, joint tenancy, or tenancy in common, in the title documents. Because RDPs and married same sex couples are entitled to all of the same rights and subject to all of the same responsibilities as opposite sex married couples, all couples with any of these legal statuses are subject to California’s community property regime. This means that there is a presumption that if such a couple acquires property during the tenure of their legally recognized relationship, the property is community property. However, the source of the down payment and the source of mortgage payments must also be taken into account. Only income acquired after the date of registration or marriage is presumed to be community property (IRS Chief Council Advisory 2010210, May 28, 2010), and, as such, only real property acquired with community property funds is truly community property. Even real property acquired after the date of registration or marriage with previously owned assets, no matter the intent of the couple, can have a separate property interest that must be accounted for, unless there is a transmutation by the parties.
It is especially important that the intended ownership is properly identified on the original title because, although under California law, a transfer of real property between RDPs or same sex spouses does not constitute a change of ownership that would trigger a reassessment, RDPs and legally unrelated couples do not have use of the unlimited marital deduction, a federal right, and, as a result, they do not have the option of making unlimited transfers between themselves without the potential of those transfers being characterized as taxable transfers by the IRS. This means that if title is taken incorrectly in the original title and must later be corrected to reflect the intended ownership of the property, there is a chance that this latter change in ownership will have negative tax consequences for the affected couple if it is treated as a gift or a taxable event. Community property has a different tax treatment at death which can significantly benefit the survivor, however not all property should necessarily be title as community property. We recommend that you consult an attorney before changing title to property.
If property is incorrectly titled, it is also possible that the incorrect titling could lead to a situation where upon the death of one partner or spouse, the survivor could lose control over the decedent’s one-half of the property, which, when there are other family members involved, can ultimately result in the survivor being unable to retain ownership of the property.
Because so many families own real estate prior to marriage or domestic partnership, an analysis of title is necessary to insure that real property assets are titled correctly. The existing legal framework requires that the professionals involved with the transfer and titling of assets understand the issues, talk freely with their clients to insure that they have all of the necessary information to properly title an asset. Titling companies often refuse to give titling advice so it is up to the client to access the proper information.
In light of the current legal framework and the significant issues associated with titling, we recommend the following language for use in titling documents: For RDPs: “Jane Smith and Sally Jones, Registered Domestic Partners, as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For married same sex couples: “Jane Smith and Sally Jones, spouses (or wife and wife), as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For RDPs and married same sex couples: “Jane Smith and Sally Jones, spouses and Registered Domestic Partners, as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For unrelated same sex couples: “Jane Smith and Sally Jones, as [separate property/joint tenants/tenants in common]”
*California Family Code Section 297(b)(5)(B) permits opposite sex couples to register as domestic partners if at least one of the parties is at least 62 years old and eligible for Social Security benefits.