Who Owns What? Understanding How You Hold Title to Property

When you own real estate, the way you hold title affects how the
ownership of your property can be transferred and how the property can be
financed, improved or used as collateral—and all this has tax implications.

I’ve written on this before, but I recently worked with a couple who could
save tens of thousands of dollars if they simply change how they held title. This
inspired me to write about this again.

Before I go on, let me be crystal clear: I am not an attorney or an
accountant. People’s decisions on how to hold title impacts their income tax,
capital gains tax, property tax, inheritance tax, legal positions and more. This
column will not provide instructions on how to hold title but rather arm you with
questions to take to your accountant and attorney. Every situation comes with its
own complications that MUST be addressed by those professionals.

Okay, let’s dig in. Regardless of what type of real estate you own, whether
it’s residential, commercial, or something else, someone (or some entity) holds
title. Methods of holding title include joint tenancy, community property,
community property with the right of survivorship, sole ownership, sole and
separate property, trusts, tenants in common, partnerships, limited liability
companies (LLCs) and limited liability partnerships (LLPs), and S-corporations
and C-corporations.

In this article I’ll review the first several methods. I’ll describe the others in
subsequent articles.

Joint tenancy is a form of property ownership where two or more
individuals hold equal, undivided interests in a property. When one owner dies,
their share of the property automatically goes to the surviving owners. For
example, if the eldest of four siblings dies, the remaining three siblings
immediately own the whole property (subject to any valid liens)—no probate, no
will, no hassle. And one-quarter of the property value is stepped up to market
value for tax purposes. This arrangement is often used among family members.

For joint tenancy, all parties must have the same percentage of ownership
and must acquire title by the same deed. Any of the individuals can sell their
share, but that immediately invalidates the joint tenancy status and a tenancy in
common is created between the remaining owner(s) and the new owner.

Community property is usually how spouses own property together. Each
has the same share, and the liability is the same as with a single owner. A big
benefit of community property is that if one spouse dies, both halves of the home
are stepped up (or revalued to market value). When this happens the basis for
depreciation and capital gains taxes is also reestablished. This is important
because now, if the surviving owner sells, he or she will only pay capital gains
taxes on whatever is left over on the difference between the stepped-up basis
and the sale price.

The not-so-good thing about community property is that ownership is not
necessarily passed to the surviving spouse. The property must go through
probate and can be willed to anyone the decedent chooses. So, the surviving
spouse may be stuck owning a home with an ungrateful stepchild. To avoid this,
you can hold title as community property with right of survivorship. That way the
stepchildren can’t make a claim on your home. Well, they can try, but they won’t
have a legal leg to stand on.

If you don’t want to share ownership with your spouse (or if you’re single),
you can own a property all by yourself: if you’re married, it’s called sole and
separate ownership; if you’re single, it’s simply called sole ownership. If you are
the sole owner, you get to make all the decisions, unencumbered by a partner or
spouse; however, you also get to shoulder all the liability.

If you’re married with sole and separate ownership, your spouse has no
claim on your share of that property. You can sell the property, and the revenue
remains outside the marriage.

The advantage is that in the case of death or separation, you control the
property. The downside is that bringing this up to your spouse could certainly
make for interesting dinner conversation. I rarely see this type of ownership when
a young couple gets married and starts their life together. But if people get
married later in life, and both spouses have more complicated or established
financial pictures, sole and separate ownership can make sense.

Remember, I am not an attorney or accountant. Do not think that by
reading this column you now have all the information you need to make what usually amounts to complex and legally binding decisions with significant tax
implications.

If you have questions about property management or real estate, please
contact me at [email protected] or call (707) 462-4000. If you have an
idea for a future column, share it with me and if I use it, I’ll send you a $25 gift
certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more
than 50 years. The opinions expressed here are his and do not necessarily
represent his affiliated organizations.