You are getting ready to purchase your first home and you are presented with a question: “How do you want to hold title to the property?”
Huh? You’d learned all about qualifying for a mortgage, interest rates, home inspections, and countless other things. You must have missed this one. Unfortunately, answering the question is not just choosing between one thing and the other. In fact, it can be very complicated. While many real estate agents are knowledgeable in helping their clients understand the issue, there are just as many that are not. One option may work for one person, but be completely wrong for another. The following covers the basics of the different alternatives. As we are based in California, this discussion will consider the law here in our state.
Sole Ownership. In situations where the home will be owned by one person the title will reflect sole ownership. This is possible for someone who is unmarried as well as a married person who will hold title as separate property.
Joint tenants with rights of survivorship. In this form of ownership, two or more persons share equal ownership and share the right to keep or dispose of the property. Holding title as joint tenants provides for the immediate and automatic transfer of title to a surviving spouse upon the death of the first spouse. Joint tenants are not allowed to pass along their interest to anyone through a will. In the case of a married couple the issue of heirs is probably not a problem as their heirs are probably the same – but it could be a problem if each spouse had children from a prior marriage.
Many California married couples own their homes as joint tenants because they want the surviving spouse to own the entire home, without having to go through the probate process (which is lengthy and expensive). However, there is relatively new alternative (discussed below) that can achieve the same result.
Under income tax rules, property received from a decedent receives a step-up in basis to the value at the time of death. This is important as it reduces potential taxes on the gain when the property is sold. However, with property owned as joint tenants only the decedent’s portion of the property receives a step up in basis.
Community property. Nine states, including California, have laws that dictate that each spouse owns one-half of the couple’s property. Upon the death of one spouse, one-half of the property is inheritable by that person’s heirs. The surviving spouse retains his or her one-half. The chief drawback of titling property as community property is that it does not provide automatic transfer to the survivor at death. The survivor must petition the court for a spousal property order, or initiate a probate proceeding. Another drawback is that the entire property becomes liable for the debts of either spouse. One advantage to holding title as community property is that upon the death of the first spouse the entire property will receive a step-up in tax basis.
Community property with right of survivorship. In 2001 California enacted a new law that allowed a husband and wife to hold title to their property as community property with right of survivorship. This form of holding title combines the benefits of holding title as community property and the benefits of joint tenancy. In other words, the couple gets the desirable tax features of community property with the right of survivorship of joint tenancy. Prior to 2001, a husband and wife had to choose between these two benefits.
Trust. Revocable living trusts are a common method of holding property. One major advantage of holding title through a trust is that probate proceedings can be avoided in the transfer of property on the death of the husband or wife. The terms of the trust supersede state law and the community property will go exactly where the spouses want it to go. A trust provides many other additional benefits for estate planning and passing assets to heirs.
Tenancy in Common. Property may be owned by two or more people with each owner holding a percentage of ownership interest in the property. It is an undivided interest and the percentages do not have to be equal. There is no right of survivorship with a tenancy in common. The ownership may be left to any heir. This is not a common way to hold title to a residence but is sometimes used for holding commercial property.