Like the title to a good book, the method of how the owners hold title to real property can tell you a lot about the purpose of the property.
How an owner intends to utilize the property dictates how title should be held.
Additionally, what the owners want to accomplish when title is conveyed through a sale, probate or some other means should be considered when the property is acquired.
In part one we discussed sole owner and joint tenancy. In part two I will highlight some of the attributes of community property, tenancy in common and the use of entities like corporations.
Community Property (with right of survivorship)
In a community property state like California it is advantageous for a married couple to hold title as community property.
Community property is similar to a joint tenancy with the added advantage of being able to will your ownership and the tax advantage on a stepped-up basis.
You cannot will your ownership in a joint tenancy as when a joint tenant dies his share is automatically transferred equally to the other joint tenants. Community property gives you the ability to will your ownership to others.
A stepped-up basis would bring the value of the spouses half who passed away to the current value at the time of death. This could create tax advantages to the surviving spouse if he or she were to sell the property.
Tenancy in Common
Tenancy in common is a widely-used method of holding title as it allows for the tenancy in common owner to sell or will his portion of ownership.
Each owner is allowed to have an undivided and unequal interest in the property. For example, Paul can have a 25 percent undivided ownership, Martha, 35 percent undivided ownership and Joseph, a 40 percent undivided ownership.
Undivided means they are allowed to use the entire property, but would only receive their percentage of income, share in their percentage of expenses and receive their percentage of proceeds upon a sale.
This form of ownership is widely used in condominium projects as well as time shares or resort ownerships.
Corporation & LLC
Title can become complicated when you start to include legal entities. In fact, one or more legal entity could hold title in any of the described methods just as an individual could except for community property.
There are tax ramifications when holding title as an entity, which could greatly affect the ongoing ownership as well as the eventual disposal of property.
For example, a corporation would have significant tax consequences when disposing of real estate. Whereas a multi-member LLC would be in jeopardy of losing the ability to perform a 1031 exchange just for the mere fact there are multiple members.
I am just brushing the surface as we look into the different methods of holding title.
As you can see it is critical to establish the best form of title upon acquisition as not knowing the details could be costly.