Real property or real estate is titled to convey ownership. This means that title must be transferred when assets are sold and must be cleared (free of liens or encumbrances) in order for the transfer to take place. Real estate ownership can take several forms, each of which has implications on how ownership can be transferred and can affect how they can be financed, improved or used as collateral.
Each of the types of title methods has its advantages and disadvantages, depending on an individual’s particular situation and how one wants to pass ownership in the event of such things as death, divorce or sale. The most common of these methods of holding title is as follows:
- Tenancy in common
- Joint tenancy
- Tenants by Entirety
- Sole ownership
- Community property
- Living Trust
Tenancy In Common
With tenancy in common, two or more persons hold title to real estate jointly, with equal rights to enjoy the property during their lives. Unlike joint tenancy, tenants in common hold title individually for their respective part of the property and can dispose of or encumber it at will. Ownership can be willed to other parties, and in the event of death, ownership will transfer to that owner’s heirs undivided.
Tenancy in common allows for one owner to use the wealth created by their portion of the property as collateral for financial transactions, and creditors can place liens only against one owner’s particular portion of the property.
Any liens on the property must be cleared in order for a total transfer of ownership to take place.
Joint tenancy occurs when two or more people hold title to real estate jointly, with equal rights to enjoy the property during their lives; in the event of the death of one of the partners, their rights of ownership pass to the surviving tenant(s).
The advantage of this method is that the parties in the ownership need not be married or related.
The downside is that any financing or use of the property for financial gain must be approved by all parties and cannot be transferred by will after one passes. If the parties are not married, in order to get out of the title, they must petition the court to divide the property or order its sale.
Tenants By Entirety
Tenants by the entirety is an ownership in real estate under the fictional assumption that husband and wife are one person for legal purposes. This method conveys ownership to them as one person, with title transferred to the other in entirety if one of them dies. This method can only be used when owners are legally husband and wife.
The advantage of this method is that no legal action need take place at the death of one’s spouse. There is no need for a will, and probate or other legal action isn’t necessary. (Read about how to avoid this expense in your estate plan in Skipping Out On Probate Costs.)
Conveyance of the property must be done together and the property cannot be subdivided. In the case of divorce, this type of title automatically converts to a tenancy in common, meaning that one owner can transfer ownership of their respective part of the property to whomever they wish. (Read about the dangers of fraudulent conveyances in Protect Your Personal Assets.)
If you are single, one way to hold title to your home is in your name alone. This method is also called ownership in severalty.
When a married person takes title to real property in his or her name alone in sole ownership, the spouse is usually asked to sign a quitclaim deed giving up any ownership interest in the property.
This might be done, for example, when a husband invests in properties but his wife is not involved with the realty investments.
There are no special tax or other advantages of holding title in sole ownership. When the sole owner dies, any property held this way is subject to probate court costs and delays.
Husbands and wives who acquire realty in the community property states of California, Nevada, Louisiana, Wisconsin, Texas, Arizona, Washington, Idaho and New Mexico can take the title as community property. Each spouse then owns half the property, which can be passed by the spouse’s will either to the surviving spouse or someone else.
A special advantage is that community property assets willed to a surviving spouse receive a new stepped-up basis at market value on the date of death. In 1987, the IRS extended this community property stepped-up basis advantage to husbands and wives holding joint tenancy titles in community property states.
To qualify, IRS Revenue Ruling 87-98 requires spouses to acknowledge in writing to each other that their joint tenancy property is also community property.
Probably the best way to hold title to homes and other real property is in a revocable living trust. There are many advantages, such as avoidance of probate costs and delays.
Other than the modest cost of creating a living trust (usually less than $1,000) and deeding real property into the living trust, there are no disadvantages. Until the death or disability of the trust creator, the home and another real estate in the living trust are treated normally.
Stocks, bonds, bank accounts, automobiles and other major assets can also be held in a living trust. Since the living trust is revocable, these assets can be bought, sold and financed normally. If the trustor becomes incompetent, the named alternate trustor (such as a spouse or adult child) takes over management of the trust assets. When the trustor dies, the assets are distributed according to the trust’s terms.
Privacy is a major advantage. Unlike a will, which becomes part of the public probate file, the living trust terms remain private. For example, late Bing Crosby held virtually all his assets in a living trust and its terms never became public. Still another advantage is that court challenges of living trusts are virtually impossible, whereas will challenges by disappointed relatives occur frequently.
The methods of owning real estate are determined by state law, so individuals trying to determine the best method to acquire and hold real-property titles should conduct local research to determine the unique differences for each method as set out by the state.
For those considering owning real estate through a business entity, such as a corporation, trust or partnership, it is advisable to consult real estate, legal and tax professionals to determine which ownership structure is the most beneficial for their particular situation.
If you’d like more information on the San Fernando Valley or Los Angeles, or to have help looking for your next home, please feel free to reach out! I’m happy to help, no obligation.