Introduction

Property transfers can have important legal and tax consequences. Before you start the paperwork, it pays to patiently go over the key issues, including property ownership, lender policies, title rules, tax implications of transfers, and California's real estate disclosure laws. You may even learn something that prompts you to change the way you make the transfer.

For example, here are some of the questions you should keep in mind:

• Will the transfer make loans on the property come due all at once?
• Will the property transfer you have in mind trigger a local property tax reassessment, causing an increase in the property tax?
• Will the transfer necessitate filing a gift tax return with the IRS?
• Are the current owners legally obligated to make written disclosures to the new owner about defects in the property?
• If you transfer property and then declare bankruptcy soon after, could creditors have the transfer invalidated?

The good news is that few of these issues are likely to apply to your situation. This chapter explains each issue; reading the first paragraph or two of each section should let you determine whether or not the material is relevant.

Understanding Basic Terminology

Before we go on, let's stop a minute and define a few important real estate terms. A much more complete glossary is in the back of the book.

Don't despair if it seems like a short course in Greek; we'll redefine the important terms when you run across them again.

Real Property

Real property (real estate) is land and things permanently attached to land -- everything from houses and trees down to built-in appliances. Thus, a mobile home that is installed on a foundation is usually considered real property. Anything that's not real property is "personal property." Personal property that has been permanently attached to a structure on the property (for example, chandeliers or built-in bookshelves) is considered a "fixture" and part of the real property. It automatically passes to the new owner under a deed, unless the parties to the transfer agree otherwise.

Ownership

"Ownership" of real property, as a legal concept, is more complicated than it may appear. Most people think of ownership as an absolute thing -- you either own property or you don't. The law, however, sees property ownership as a package of distinct "ownership interests." This package can be split in certain ways, and pieces of property ownership given to different people.

There are two common ways for ownership of property to be split. One is when ownership is shared at the same time. For instance, if you and your spouse, or you and your three sisters, own a house together, you each own part of the whole interest in the property. (Depending on how title to the property is held -- as a joint tenancy, tenancy in common, community property, etc. -- the co-owners have different legal rights and responsibilities. See Chapter 3.)

Other "interests" in property can also be shared at the same time. For example, a neighbor may own an easement -- a legal right to use part of your land subject to certain conditions (for example, the right to run a water pipe or path over a certain part of the land). As an easement owner, the neighbor is in essence a "co-owner" (although he would never be referred to as such in normal conversation) and you must take his rights into consideration before you transfer the property. Put differently, you can only transfer what you own -- and if a neighbor acquired part of your ownership rights in the form of a right-of-way across the land, there's nothing you can do about it now. When you transfer the land, the easement goes with it, and the new owner takes the property subject to the easement.

Someone with a lease on the property also has some of the rights of the owner -- the right to possess the property during the term of the lease, of course, is the important one. He can transfer those rights (if the lease permits it). Similarly, the owner can transfer her ownership rights, but can't end or interfere with the rights of the person with the lease. In other words, the property is transferred subject to the lease.

Ownership can also be shared over time. For instance, a deed may specify that one person owns property only for a certain period of time (most frequently, his lifetime). If someone has such a "life estate," somebody else, by necessity, has an ownership interest in the property that will take effect after the first person dies. This second person's ownership rights do not include the right to use the property while the first owner is alive. But the second owner may, for instance, require the first owner to maintain the property's value by keeping it in good shape and making property tax and mortgage payments. These arrangements are quite rare these days. They are leftovers from the English feudal system of land ownership, when real property was almost the only measure of wealth and power and it was common for ownership interests to be divided intricately among many heirs.

Title

The owner of a piece of property is said to have "title" to it. Title is proof of ownership. In that sense, title is just a shorthand way of referring to ownership. However, the two terms are not synonymous. It is possible to change the title -- the way in which property is owned -- without changing who owns it. For instance, if before you married, you and your current spouse took title to property as tenants in common, you might now want to change it so that title is held as community property. You would continue to own the property together, but the change in the way you hold title would produce a different set of consequences when you or your spouse died. We discuss these kinds of transfers in more detail in Chapter 3.

Title Search

To find out who owns property and how they hold the title to it, the first step is to look at the deed, which shows the current owners. Deeds, however, do not reveal certain kinds of problems with title to property. To confirm ownership requires a title search -- a search of all public records of the property. Usually done by a title insurance company, the search includes examining copies of all the deeds that have ever transferred it, easements granted over it, liens placed against it, and tax and court records.

Checking the public records is usually reliable because all ownership interests in land are supposed to be recorded with the county to be fully effective (the recording system is discussed in Chapter 6). All deeds passing the property from owner to owner should be on record.

Evidence of other interests in the land will most likely be in the form of a document granting an easement, giving the property as security for a loan, or announcing that someone has placed a lien on the property to insure payment of a debt or taxes.

Title searches are routine whenever property is transferred and a bank or savings and loan is involved. Before making a loan that is secured by the property, a lender wants to make sure that the buyer is getting good title to it. Title searches are not necessary in some intrafamily transfers or when owners just want to change the way they hold title.

Title Insurance

Title companies guarantee the results of their searches by issuing title insurance policies, usually in the amount of the value of the property. Title insurance protects an owner (or whoever loaned money to finance the purchase of the property) against losses that result from a defect in the title that exists when the policy is issued and is discovered later. For example, a typical title insurance policy would cover an owner's losses if any of the transfer documents are fraudulent or forged, or if there is a lien or easement on the property that the title company didn't find when it searched the records. If an owner puts in a claim under the policy, the insurance company can, like any other insurance company, defend the owner in a lawsuit or negotiate a settlement.

In many private, intrafamily transfers, where no institutional lender is financing the purchase and all the parties are confident that the title is clear, they decide not to buy title insurance. In many situations, however, title insurance is a wise investment. Title insurance, and how to get it if you decide you want it, are discussed below.

Deeds

Deeds are the documents that transfer ownership of real property. In California, the most common kinds are grant, quitclaim, and trust deeds. Their functions are quite different. Here is a very brief overview of each:

Grant deed: The most commonly used type of deed. It contains guarantees that title being passed hasn't already been transferred to someone else or been encumbered (see the next section), except as specified in the deed. The grantor is the person transferring the property; the grantee is the person receiving it.

Quitclaim deed: A deed that is used to give up one's claims to land. Unlike a grant deed, the quitclaim deed makes no promises about the title being transferred. The maker of a quitclaim deed simply transfers whatever interest in the land he may have at the time. Quitclaims are often used when someone has a theoretical claim to real property; the potential claimant gives up the claim, and the property's owner doesn't have to worry about the claim being made later. They can also be used instead of a grant deed; they are just as effective to transfer ownership of property.

Trust deed (deed of trust): A trust deed isn't used to transfer ownership of property. It comes into play when someone uses real property as security for a loan -- which is almost anytime someone buys real estate. It is used in conjunction with a promissory note (a written promise to pay back a loan). The buyer signs the note and a trust deed, which permits its holder (the trustee) to sell the property and pay off the loan if the buyer defaults.

Encumbrance

An encumbrance is any legal claim on property that affects an owner's ability to transfer title to the property. Common encumbrances are deeds of trust, mortgages, and past-due property tax liens (claims filed against the property when property taxes are delinquent). If your property is encumbered -- say, for example, there is a trust deed on the property because you borrowed money to buy it -- before you can transfer title you will either have to remove the encumbrance (by paying off the loan secured by the trust deed) or get the buyer to agree to take the property subject to the encumbrance. (In the case of a trust deed, you would most likely also have to get the approval of the lender for the new owner to take over the loan.)

Encumbrances

If, like most homeowners, you borrowed money to buy your house and signed a deed of trust securing the loan, title to the property is encumbered. Past-due property taxes are another fairly common encumbrance. But you can skip this discussion if:

• the property being transferred has no existing deeds of trust, mortgages, past-due property taxes, or homeowners' association assessments, liens, or other encumbrances on its title (for example, the property is owned outright, free of ownership or lien claims by others, and property tax payments are up-to-date), or
• the owner(s) want only to change the form in which title is held (for example, from tenancy in common to joint tenancy, or from a single owner to a revocable trust with the owner as trustee), and the identity of the owners doesn't change.

If money is changing hands for the property, or a new owner is involved, or if you really don't know for sure whether or not there are encumbrances, it is wise to investigate just how clear the transferor's title to the property really is. That's when you need a title search (discussed later in this chapter).

Deeds and Encumbrances

When you use a grant deed (the kind of deed used most often in California) to transfer property, you automatically promise that you have disclosed to the new owner all encumbrances you have incurred. (Civil Code § 1113.) If you do not disclose the existence of such an encumbrance, you can be liable for the new owner's damages. For example, if you neglect to tell the buyer that there is a huge tax lien on the property, the buyer can sue you for what it costs to pay off the lien.

Under the law, the encumbrances about which a grantor must tell the grantee, when transferring property with a grant deed, include taxes, assessments, and liens on the property. (Civil Code § 1114.)

For example, if a carpenter who worked on a house has recorded a mechanic's lien on the property to insure that he is paid, the grantor must disclose it. Otherwise a recipient would take title to the property subject to the lien.

You are not promising that you have good title to the property. You are not responsible for other claims on the property that aren't based on your acts and are out of your control. The most common examples of such claims (none of them is very common) are claims by someone whose claim arose under a former owner, and eminent domain (condemnation) proceedings by government entities. For example, if you receive a grant deed to property and then find out there are condemnation proceedings underway, you're out of luck as far as suing under the promise that the statute says is implied in the grant deed.

Because buyers (and lenders) do not usually want to rely on the seller's disclosure and implied promise, they routinely order title searches and purchase title insurance. If a problem with the title (including an encumbrance that they didn't know about when they bought) is discovered later, the insurance will pay, and they don't have to sue (and try to collect from) the grantor.

Taking Care of Encumbrances

Most encumbrances can simply be paid off, leaving title to the property clear and free to be transferred. The most obvious example is the deed of trust. When you want to transfer property that is subject to a trust deed, you must do one of three things: pay it off, get the buyer to assume the loan, or get the buyer to take the property "subject to" the deed of trust. Assumption of a loan, which means that the new owner takes responsibility for paying it off, is handled through the bank. Your loan agreement with the financial institution, however, may have a "due on sale" clause, which limits who can assume a loan secured by the property (see below). If the new owner takes the property "subject to" the loan, he acknowledges the loan (by including a statement in the deed) but doesn't formally assume it. If the note were foreclosed on, however, he would lose the property.

Even if the property is not encumbered, a lien can appear out of thin air if the new owner has an outstanding court judgment against him. When the transfer is made, the judgment lien attaches to the property. Transferring the property back won't get rid of the lien.

Other simple money encumbrances include:

• past-due property taxes (due twice each year, in November and February)
• mechanic's or materialman's liens, filed by people who work on your house. (a lien is a notice, recorded with the county recorder, that alerts everyone to the fact that there is a claim against the property.)
• unpaid special assessment district bond liens (for example, imposed by special hospital or drainage districts), and
• judgment liens (liens placed against your property to guarantee payment of a judgment against you in a lawsuit).

A more complicated encumbrance is a lawsuit that may affect title to your property. It shows up in the public records when a notice of the suit (a "lis pendens") is recorded in the county recorder's office. You can't get rid of this kind of encumbrance by simply paying it off. You must, however, deal with it somehow, either by passing it on to the new owner, negotiating a settlement with the party who has the claim against your property, or -- if you absolutely can't avoid it -- going to court to slug it out. A common method of settlement is to pay the other party something in exchange for a quitclaim deed in which she gives up any interest that she might own in the property.

EXAMPLE: Andy and his brother Bill inherited some land from their uncle, but the uncle's will is being disputed in court by their cousin, Marsha. Depending on the outcome of the suit, Marsha may be determined to have some interest in the land. Andy wants to sell his half-interest to Bill, but title to the property is encumbered by a notice of the lawsuit (a "lis pendens"), which has been recorded with the county recorder. For payment of a few thousand dollars, Marsha agrees to drop the lawsuit and sign a quitclaim deed giving up all rights to the property. With the encumbrance removed, Bill can take clear title to the property.

Property Tax Reassessment

Many real estate transfers trigger a reassessment of the property for local property tax purposes. Reassessment usually means a higher assessed value and a higher property tax bill. (If it's not transferred, property is usually reassessed once a year according to a standard formula that allows an increase of up to 2% in the assessed value of the property.)

State law exempts some kinds of transfers from the reassessment requirement. If, under state law, a transfer is not considered a "change of ownership," the property is not subject to reassessment. (Rev. & Tax. Code §§ 62, 63.) Many intrafamily transfers of the type discussed in this book do not trigger reassessment, including:

• A transfer between spouses or registered domestic partners, or one that takes effect at the death of one spouse or partner or at dissolution of the marriage.

  EXAMPLE: When Allen marries Maureen, he wants to add her name to the title of his house, so he signs a deed from himself to both of them. The house will not be reassessed.

• Correction of a deed.

  EXAMPLE: When Denise makes out a deed to Paula, she mistakenly types "Paul" instead. To correct this mistake, which could cause confusion later on, she makes a new deed with the correct name.

• A transfer to a revocable living trust, or by the trustee back to the person who set up the trust.

  EXAMPLE: Don wants to put some property in a living trust for his children so they will inherit it outside probate when he dies. He signs a grant deed to formally transfer the property to himself as trustee of the trust.

• Any transfer between co-owners that changes only the method of holding title, without changing the proportional interests of the co-owners.

  EXAMPLE: Ray and his cousin Lee inherited property together and take title to it in joint tenancy, which carries with it an automatic right of survivorship. They want to change the way title is held to a tenancy in common so that each can leave his share to his spouse. To do this, they execute a deed from themselves as joint tenants to themselves as tenants in common. No reassessment will be made.

• Creation of a joint tenancy if one of the original owners is one of the new joint tenants.

  EXAMPLE: Martha wants to put title to her house in joint tenancy with her daughter. She executes a deed from herself to her daughter and herself as joint tenants.

• Execution of a deed of trust.

  EXAMPLE: Frank wants to borrow money from his parents, using his house as security for the loan. Frank signs a deed of trust, giving a trustee the power to sell the house and pay off the loan to his parents if he defaults.

• Transfer between former spouses or registered domestic partners in connection with a property settlement agreement or decree of dissolution of marriage or partnership.

  EXAMPLE: Luke and Lisa are divorced. The property settlement agreement states that Lisa will transfer her interest in the couple's house to Luke.

• Transfer of the transferor's principal residence (and up to $1 million of other real property), in a transfer between parents and their children.

  EXAMPLE: Sarah and Ben want to transfer title to some land they own to their children. As long as their equity in the land is less than $1 million, they can transfer it without triggering a reassessment.

If you fall into one of these exempt categories, you may have to sign a form provided by the assessor. If your property will be reassessed, the county assessor will send you (after you record your deed) a Change of Ownership Statement. Instructions for filling it out are in Chapter 6.

Gifts of Real Property: Federal Gift Tax

If a gift of real property is large enough, the giver may have to file a federal gift tax return. But even if you are required to file a return, you probably won't ever have to pay tax, because a large amount of property is exempt from tax. (See Section 3, below.)

You don't have to worry about gift tax if the property:

• is being sold for its approximate fair market value (the amount your house could fetch if sold on the open market) or
• is being given away, but the value of the equity (the total value of the property minus the amount owed on it) being given is less than $12,000 per recipient ($24,000 if a married couple is giving it), or
• is being given by one spouse to the other and the recipient spouse is a U.S. citizen.

This is a book on transfers, not taxes, and doesn't cover the subject of gift tax in detail. What we can do is alert you to potential problems and outline strategies you may want to pursue. With that warning, here are the basics of federal gift tax law.

Overview of the Federal Gift and Estate Tax

The federal gift/estate tax strikes when a property owner gives away property or leaves it at death. Most people never owe any gift/estate tax, because you can give away or leave a large amount of property tax-free. California does not levy inheritance or gift tax.

True to its name, the tax is levied on gifts and estates alike. By taxing property that's given before death, the gift tax thwarts people who try to avoid the estate tax by giving their property away before they die.

Many gifts, however, are always exempt from gift taxation, as discussed below.

What Is a Gift?

Sometimes you may not be positive whether or not the transfer you are making is in fact a gift. A gift, in the eyes of the law, is any voluntary transfer of property made without receiving anything (or receiving less than its value) in exchange. For example, if you transfer property that you know is worth $50,000 to your son and take $10,000 in exchange, you have made a gift of $40,000.

Generally, a transfer is not a gift unless you intend it to be. But the IRS doesn't know, when you transfer something for less than its market value, whether you intend to make a gift or you're just a poor businessperson. So it does the only thing it can do -- it looks at the objective evidence and demands gift taxes only if a transaction doesn't appear reasonable from an economic point of view. Don't expect the IRS to accept your simple statement that, despite every indication to the contrary, your transfer of a house to your son for $1 is just a bargain, not a gift. you will be held to have intended a gift when you know at the time that you are taking less than the fair market value for the property.

How the Gift and Estate Tax Works

The gift and estate tax is a concern for only the wealthiest citizens. The amount you can leave without paying tax is scheduled to increase until the estate tax goes away entirely in 2010, though Congress may revisit the law before then.

After that, the gift tax will survive, but everyone will get a $1 million exemption. So unless you plan to make at least $1 million in taxable gifts (and most ordinary gifts are not taxable), gift tax will not be worth a second thought.

If you make nonexempt gifts, you have to file a gift tax return with your regular income tax return. But your liability for estate and gift tax cannot be figured until you have either died or given away more than the total exempt amount in nonexempt gifts. (Exemptions are explained below.) Every time you make a nonexempt gift, you use up some of your gift tax exemption.

EXAMPLE: During his lifetime, Frank makes nonexempt gifts that total $28,000. That uses up $28,000 of his gift tax exemption; the rest of the exemption is available for property he leaves at his death.

What Gifts Are Taxable

Any gift worth more than $12,000 given to one person in one year is subject to the federal gift tax. (The giver, not the recipient, is taxed.) Each member of a married couple gets the $12,000 exclusion, so together they can give up to $24,000 per recipient tax-free. (The amount is indexed for inflation and may rise in the future.)

EXAMPLE 1: Joe gives real estate in which he has equity of $10,000 to each of his three children. He need not file a gift tax return.

EXAMPLE 2: Robin gives her son Ralph $6,000 in cash and $10,000 in real estate in one calendar year. Because the total is over the $12,000 limit, she must file a gift tax return. She will not have to pay tax now but will use part of her tax credit. Had Robin waited until January 1 of the next year to give the real estate, both gifts would have been entirely exempt.

EXAMPLE 3: In one year, Anne and her husband Peter give real estate worth $120,000 and subject to a deed of trust for $80,000 to their daughter Sophie and her husband Jeff. The total value of the gift is thus $40,000. Anne and Peter do not need to file a gift tax return. Anne and Peter each can give $12,000 per recipient, and there are two recipients, so up to $48,000 is exempt.

Some types of gifts are always exempt: gifts made to one's spouse (if the spouse is a U.S. citizen) or to tax-exempt organizations are always tax-free, no matter what the amount. So are gifts made directly for medical bills or school tuition. Gifts to a noncitizen spouse are tax-exempt up to $120,000 per year.

EXAMPLE: Francine owns a large undeveloped tract of land that is home to a diverse group of animals and plants, some of them rare. To preserve its wild state, she gives the land to the Nature Conservancy, a tax-exempt organization that acquires land to help preserve native animal and plant life. Her equity in the property is $800,000. The gift is exempt from gift tax, so it doesn't affect the amount she can leave at death tax-free.

Not surprisingly, people have figured out some clever ways to reduce or avoid their gift and estate tax liability. If you want to delve into the subject of gift-giving as an estate planning device, see Plan Your Estate, by Denis Clifford and Cora Jordan (Nolo).

Disclosure Requirements

State or local law may require you to make several kinds of written disclosures about the property to the new owners before the transfer goes through.

Real Estate Transfer Disclosure Statement

If you're selling residential (not commercial) real property, you will probably have to disclose to the buyer certain information about the property's condition. (Civ. Code § 1102.) The disclosure covers all major structures and systems on the property. For example, you must tell the buyer of significant defects in the driveway, electrical system, plumbing, roof, and foundation. A buyer then has three days to back out of the sale.

You must fill out the disclosure form shown below unless:

• the transfer is a gift
• the transfer is to a co-owner, spouse, former spouse, or direct descendant or ancestor (uncles and aunts, brothers and sisters, and cousins are not exempt, since they are not direct descendants), or
• the transfer is from a trustee, guardian, or conservator.

A tear-out copy is included in the appendix. The form is changed by the legislature fairly regularly; be sure you use the most recent version. If it has changed since this book was published, you can get a copy from a real estate broker or title company, or from the law library -- look up California Civil Code Section 1102.6. To find this statute online, go to Nolo's website at www.nolo.com and follow the links to the California statutes.

The completed form must be personally delivered or mailed to the buyer before title is transferred. The buyer has three days after the form is delivered (five days after the date of mailing, if the form is mailed) to give the seller a written withdrawal of the offer to purchase the property. (Civ. Code § 1102.2.)

The seller doesn't have to hire professionals to answer the questions on the disclosure form. The seller must, however, fill out the form in good faith and honestly and must take "ordinary care" in obtaining the information. This means that the seller is responsible for including information about the property that he or she knows or, as a reasonable homeowner, should know.

If you don't know and can't find out (by making a reasonable effort) some of the information requested on the form, you may make a "reasonable approximation" as long as you make it clear (on the form) that the information is an approximation that is based on the best information available to you.

If an error or omission is carelessly or intentionally made in the statement, the sale is still valid, but the seller is liable for any actual damages the buyer suffers. For example, if you sell your house and forget to disclose the fact that the roof leaks (and you know or should know it does), the sale is still good, but if the buyer sues you, you'll have to pay for the damage that the leak causes and the cost of repairs.

You should take seriously your responsibility to disclose problems and err on the side of more, rather than less, disclosure. Many homeowners, although it is not required by the law, are choosing to protect themselves by hiring (or encouraging the buyer to hire) a general contractor to inspect the house and write a report on its condition. Home-inspection firms are popping up in response to the demand. an inspection and written report for an average-sized house costs from about $250 to $550. If you do get a report, make sure the new owner gets a copy and acknowledges its receipt in writing.

Natural Hazard Disclosure Statement

The Real Estate Transfer Disclosure Statement includes information on many hazards affecting the house, some of which require additional disclosures. State law requires sellers to provide buyers with a Natural Hazard Disclosure Statement indicating if the property is in one of six hazard zones (Civ. Code § 1102.6c):

• a flood hazard zone designated by the Federal Emergency Management Agency (FEMA) (42 U.S.C. §§ 4001 and following)
• an area of potential flooding due to failure of a dam as identified by the Office of Emergency Services on an "inundation map" (Gov't. Code § 8589.5.)
• a very high fire hazard severity zone designated by a local agency (Gov't. Code §§ 51178, 51179, 51182, 51183.5)
• a state-designated wildland fire area zone (Pub. Res. Code §§ 4125, 4136)
• a delineated earthquake fault zone as identified by the California State Geologist (Pub. Res. Code §§ 2621.9, 2622), or
• a seismic hazards zone (area where landslides and liquefaction are most likely to occur) as defined under Pub. Res. Code §§ 2694, 2696.

These designations are often puzzling, at least to a layperson. For example, San Francisco is not within an earthquake fault zone. That's because the fault line isn't in San Francisco -- although San Francisco has certainly experienced the ravages of earthquakes. Also, sometimes the available maps and information are not of sufficient accuracy or scale for a seller to determine whether or not his property falls inside or outside of a designated hazard zone, such as a high fire hazard severity zone. In this case, the law requires the seller to mark "Yes" on the Natural Hazard Disclosure Statement -- unless the seller has evidence, such as a report from a licensed engineer, that the property is not in the fire hazard zone. (Civ. Code § 1102.4.)

A blank Natural Hazard Disclosure Statement (NHDS) is included in the appendix.

Earthquake and Seismic Disclosures

In addition to the Natural Hazard Disclosure Statement, state law requires sellers to provide information on the safety of the house itself and its ability to resist earthquakes.

Residential Earthquake Hazards Report

The seller must disclose any known seismic deficiencies on the property, such as whether or not the house is bolted or anchored to the foundation and whether cripple walls, if any, are braced. (Gov't. Code § 8897.) The seller is not required to hire anyone to evaluate the house or to strengthen any weaknesses that exist. If the house was built in 1960 or later, oral disclosure is enough.

If the house was built before 1960, the seller must disclose in writing and sign the disclosure form, Residential Earthquake Hazards Report, included in a booklet called the Homeowner's Guide to Earthquake Safety. The seller must give the buyer a copy of this booklet and disclosure "as soon as practicable before the transfer." The Homeowner's Guide to Earthquake Safety is available from the Seismic Safety Commission (SSC), 1755 Creekside Oaks Drive, Suite 100, Sacramento, Ca 95833. You can phone the SSC at 916-263-5506 or check its website at www.seismic.ca.gov.

Water Heater Bracing

All water heaters must be braced, anchored, or strapped to resist falling or displacement during an earthquake. (Health and Safety Code § 19211.) Anyone selling property with such a water heater must certify in writing (on the Real Estate Transfer Disclosure Statement) that the heater complies with the law.

Environmental Hazards

Item C.1 on the real Estate Transfer Disclosure Statement asks the seller to identify environmental hazards on the property, such as radon gas and contaminated soil. In addition, sellers should provide prospective homebuyers a copy of Environmental Hazards: A Guide for Homeowners and Buyers, which provides information on different environmental hazards which may be on or near the property, such as asbestos, formaldehyde, lead, and hazardous wastes, and lists federal and state agencies and publications for more information. This booklet is published by the California Department of Real Estate, the California Environmental Protection Agency, and the Department of Health Services, and is available from the California Association of Realtors (CAR). For price and order information, call CAR at its Los Angeles office at 213-739-8200 or check out its website at www.car.org.

Lead

HUD rules require that applicants for FHA mortgages be given a lead-based paint notice disclosure form before signing the final sales contract. Lead paint in homes financed by the FHA must be removed or repainted.

California law requires that a seller disclose lead-based paint hazards to prospective buyers on the Real Estate Transfer Disclosure Statement. (Civ. Code § 1102.6.) Furthermore, sellers of houses built before 1978 must comply with the Residential Lead-Based Paint Hazard Reduction Act of 1992 (42 U.S.C. § 2852d), also known as Title X. Sellers must:

• attach a federally required disclosure form, "Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards," to every sales contract for residences built prior to 1978, and disclose any known lead hazards in the house or outbuildings
• give buyers a pamphlet prepared by the U.S. Environmental Protection Agency (EPA) called Protect Your Family from Lead in Your Home
• keep signed acknowledgments for three years as proof of compliance, and
• give buyers a ten-day opportunity to test the housing for lead.

If a seller fails to comply with Title X requirements, a buyer can sue the seller for triple the amount of damages.

Disclosure of Deaths

State law implies that the seller should disclose any deaths known to have occurred on the property within the past three years. If a death occurred more than three years ago, the seller need disclose it only if asked. ( Reed v. King, 145 Cal.app.3d 261 (1983).)

Military Ordnance

Sellers who know of any former federal or state ordnance locations (once used for military training purposes which may contain potentially explosive munitions) within one mile of the property must provide written disclosure to the buyer as soon as practicable before transfer of title. (Civ. Code § 1102.15.)

Registered Sex Offenders (Megan's Law)

Contracts for the sale of a house or other residential property must include a notice, in not less than eight-point type, regarding the availability of a database maintained by law enforcement authorities on the location of registered sex offenders. (Civ. Code § 2079.10a.) This database is available through a "900" telephone service. Callers must have specific information about individuals they are checking, and information regarding neighborhoods is not available.

The seller or broker is not required to provide additional information about the proximity of registered sex offenders. The law clearly states, however, that it does not change the existing responsibilities of sellers and real estate brokers to make disclosures of "material facts" that would affect the "value and desirability" of a property. This means that a seller or broker who knew for a fact that a registered sex offender lived next door or a few houses down would be responsible for disclosing this "material" fact to the buyer.

For more information on this disclosure requirement, check out http://caag.state.ca.us.megan. A contract containing the necessary language is in For Sale by Owner in California, by George Devine (Nolo).

Local Disclosure Requirements

Many cities and counties have local disclosure requirements and you may be required to use an additional form. For example, in Los Angeles, sellers must disclose applicable zoning laws. Check with the city or county planning or building department to find out about any local requirements. You may need a special form, the Local Option Real Estate Transfer Disclosure Statement. (Civ. Code § 1102.6a.) A blank form is included in the appendix.

Documentary Transfer Tax

You don't have to worry about this tax if the transfer is a gift.

This tax, which is based on the sale price of the property, is collected by the county recorder when a deed is recorded. No documentary transfer tax is due unless the property is sold. For example, a gift (including a transfer to a revocable living trust) or a transfer pursuant to a court order is exempt from the tax.

The basic tax rate is 55¢ per $500 of the sales price. Some cities add surtaxes so that the total rate is considerably higher. You can find out the rate in your city by calling the county recorder's office.

Transfers Before Bankruptcy

If you think you may have to declare bankruptcy, special rules may restrict your right to transfer or mortgage valuable property. If you give property away (put it in someone else's name) to frustrate the bankruptcy laws, the transfer may be considered fraudulent. (Uniform Fraudulent Transfer Act, Civ. Code §§ 3439 and following.) In some circumstances, the transfer can be voided by a court and the property used to pay your creditors. In general, transfers immediately before bankruptcy are suspect, and transfers made up to a year before bankruptcy can be trouble.

More information about property and bankruptcy. See How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard and How to File for Chapter 13 Bankruptcy, by Stephen Elias and Robin Leonard, both published by Nolo.

Do You Need a Title Search and Title Insurance?

As discussed briefly above, title insurance is a way for a buyer (or lender financing a purchase) to be sure that if there's a problem with the title to the property he's just bought, the title insurance company will make it good. Insurance protects the buyer against problems that have already occurred. For example, suppose somebody once put the wrong property description on a deed, forged an owner's signature, forgot to get her spouse to sign the deed, or otherwise messed up. If for some reason a title search doesn't disclose the error, insurance will protect the buyer and lender. Title insurance doesn't protect against acts of the government such as condemnation proceedings or zoning restrictions.

Title Searches

A title search turns up encumbrances on the title to property. If you don't know what encumbrances may exist on the property you want to transfer, and having this information is important (for example, the property is going to new owners, or a significant sum is being paid for the transfer), you will definitely want to have a title search. If, on the other hand, you know no encumbrances exist or your transfer involves a change of title (for example, from tenancy in common to joint tenancy) but no new owners, you probably won't need a title search (though it never hurts).

A title search gives you an accurate picture of who owns the property and turns up most kinds of claims others may have against it. Specifically, a title search tells you if:

• the property has been pledged as security for a loan
• an easement has been granted
• certain liens (claims that prevent title to the property from being transferred until the lienholder (creditor) is paid the lien amount) have been placed on the property
• the property taxes haven't been paid
• a lawsuit has been filed contesting ownership of the property, or
• a prior deed (say, the one transferring the property to whomever you got it from) was invalid.

A title search should check the validity of all prior transfers of the property. This string of transfers, which in California often stretches back in time to grants from the Mexican or United States governments in the 19th century, is called the chain of title. If a deed to the land was ever improperly executed, or the property description in the deed was wrong, and the error went uncorrected, the current owner may not hold valid title to the land. Theoretically, all transfers are recorded in the public records. If evidence of a transfer -- a link in the chain of title -- is missing, that's a problem in itself, and it may necessitate a trip to court to resolve any uncertainty.

These days, title insurance companies may not actually check all the old transfers. They rely on previous checks and just make sure there are no new problems with the title. Computerized records have largely replaced microfiche records, and the computer data often do not include the older transfers.

Virtually no layperson does a title search; it's a tedious, time-consuming job. and without some experience, it's easy to mess up. But if you want to be sure title to the property is clear, what should you do? Let's stop a minute and look at your options.

1. Go without a title search. If you are merely changing the way title is held and not bringing in any new owners, or putting property in a revocable living trust, you may not need a title search.

Also, if the property was transferred to the current owner fairly recently, the title was checked then (as it always is in standard transfers; a bank wouldn't think of lending money to finance the purchase of property without it), and you know that no liens or other encumbrances have been filed since, you're pretty safe not bothering with another search.

2. Get a property profile that checks the current title only. Title companies, which keep copies of the public records in their offices, furnish free "property profiles" that show the current state of the title to property (that is, without checking all the prior transfers, as a full title search would).

A property profile contains photocopies of everything in the public records that affects the property now. It typically includes:

• Cover page: This lists the property address, owner, assessed value, and property tax due.
• Grant deed: a copy of the deed that transferred title to the current owner will always be included.
• Deeds of trust: all deeds of trust recorded against the property should be included.Make sure all pages of the deeds, including attachments, are there. Many property profiles only have the first page of the trust deed, which may not contain critical "due on sale" or "acceleration" clauses. The deed will not expressly tell you whether it is the first, second, or third deed of trust recorded against the property; that is determined by the order in which they were recorded.
• Assessor's map: This shows the subdivision map filed with the county. The map shows the lots and boundaries of the property and also the assessor's parcel number (APN), which the assessor uses on the tax bills. It's critical that you check the legal description and APN given on your grant deed against what's on this map.

3. Pay a pro to do the title search. For $100 to $250 or so, you can hire a title company to conduct a title search of your property. The fee is one of those "closing costs" that every buyer of real estate has come to know and love. The company will search the public records and issue a report showing:

• the legal owner's name
• all liens, restrictions, easements, and other encumbrances
• the legal description of the property, and
• local property taxes that have been assessed.

Some title companies do not sell title reports separately; you must also buy title insurance. The price of insurance depends on the value of the property; $1,000 to $1,500 for property worth $100,000 is a good estimate. you may need to make a few phone calls to find a company in your area that will do a title search separately.

4. Do the search yourself. If you're a diehard do-it-yourselfer, and have plenty of spare time, you can try to do the search yourself, but it's not a cost-effective way to spend your time. (And a title company won't insure a title that it hasn't checked itself.)

To search the title to property you must start with the "Grantor-Grantee Index" (usually kept on microfiche) at the county recorder's office. In it you can look up the current owner's name and start going backwards in time from the current deed. remember that you have a long, long way to go (more than 100 years, almost certainly), and that you'll need to check every name and legal description in every deed to the property. You will also need to look up the property in the county assessor's property tax records and the general county records that show bankruptcies, divorces, name changes, and judgments. Finally, you will need to go through the bankruptcy records of the federal district court.

Obviously, doing a title search yourself is a complex task that takes practice to get good (or even competent) at, and given the risks involved, it's well worth it to pay a professional. Moreover, when you go to sell (or borrow money on) the land later, no one will want to rely on an amateur's title search, so you'll probably end up paying for a title search sometime. For your peace of mind, if you want a title search, get it done right.

What a title search can't show. Obviously, a title search can't uncover unrecorded transfers. And no title search will reveal the extent to which California's community property laws affect ownership of the property. Those laws may mean, for example, that even if the house is in one spouse's (or domestic partner's) name alone it belongs to both and that both must sign the deed. We discuss this point, and how to handle it, in Chapter 2.

Similarly, an unmarried live-in lover may have property rights based on an implied contract. See Chapter 2.

Title Insurance

Usually, the point of having a title search is to enable you to buy title insurance. It works like this: The title insurance company searches the public records and issues a preliminary title report (the "prelim"), which shows all encumbrances of record. Then the company issues a title insurance policy, guaranteeing that the title is clear of encumbrances except those specified on the preliminary report.

The buyer's policy is in the amount of the purchase price of the property. Usually it is a CLTA (California Land Title Association) policy. If someone (including the seller) is lending money to the buyer, and the loan is secured by a deed of trust on the property, the lender usually buys a separate insurance policy that covers him for the amount of the loan. The lender's policy is often an ALTA (American Land Title Association) policy, which offers broader coverage than the standard CLTA policy.

What If the Title Search Turns Up Problems?

If there is a problem in the chain of title -- meaning that somewhere along the line the property was imperfectly transferred -- the current owners will have to correct the defect. Correction will entail either a new deed (often in the form of a quitclaim deed, discussed in Chapter 5) or going to court to have a judge resolve any uncertainty in who owns what.

For example, say that your father, the previous owner of the property you want to transfer, mistakenly left out a 50-foot strip of the property when he deeded the land to you. If this mistake is not corrected, the new owners will be getting less than they think they are.

What can be done to rectify the mistake? Your father can execute a new deed transferring his interest in the omitted property to you. If he were no longer living, you would have to go to court in the county where the property is located and get a judgment saying the property belongs to you. That process almost certainly requires a lawyer and is beyond the scope of this book.