Have you ever wondered what would happen to your properties once you’ve gone to the end of the road? To ease your mind, knowing how to hold real property title can be the solution. Athena Paquette Cormier shares four easy methods on how you can hold title for your properties and ensure your property goes to the heir you intend for. She goes into detail for each one, defining their differences and similarities. Choose the best one for your current situation and avoid any complications in the future.
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Basics Of Holding Title
I wanted to talk briefly about ways to hold a title. I get a lot of questions about this and I thought it would be good to do a How to Hold a Title 101. How to hold a title, you hold title to a lot of things and don’t know about it. Your bank accounts, for example, if you put your name on your bank account, that has implications. Whereas if you have your bank account with the word with the letters TOD, that helps that means Transfer on Death. You also hold title to your car, your home, maybe to your boats or other toys. Mostly things that have significant values. For example, you don’t hold title to personal property like jewelry and art. There’s no way to own that because there’s no title to it. What I’m talking about is how to hold title to real property. Property that is a real estate and has land to it or is on leased land, but that the property is real property.
We’re in California and there are other states that have this law called Community Property Law. When you’re in a community property state, if you say nothing, the law decides or implies that the property is held in community property. To change that, you actually have to hold a title was specific word verbiage. Community properties between husband and wife or domestic partners in certain states are recognized as legal marriages because they fall under the same rules. They’re recognized by the state that they’re in as a legal union. Community property is that so if you hold property in community property, both owners have equal management and control of the property and all the valuables can be conveyed with it.
The purchaser who purchases the property cannot acquire part of it because the community is its own community. That community would be broken in order to bring in another person. Also, community property that’s held in community property is implied as a 50/50 percentage ownership. I’m going to talk more about percentages in a little bit. If one of the parties to a community property held property passes away, 50% goes to their descendants, not to the other person. A lot of people in marriages think that automatically. Since they own the property with their spouse, if that spouse passes away and let’s say there are heirs, the first spouse would be the first heir, but what if there are children from another marriage and so on. You want to be careful with assuming that you might own the whole property. If the property is passing by will, it usually goes to the heirs.
Community property is the least favored way of holding property. I’m going to move on to joint tenancy. Joint tenancy is for any number of owners, two or more owners, typically though it’s used for people who are married and it is one ownership. We talked about the 50/50 in the community property, now it is one title one ownership. The moment one of the co-owners passes, 100% of the ownership of the property goes to the other person automatically without probate or without the courts having to do anything. When you hold property in a joint tenancy, it automatically passes to the other owner. Now, if someone wants to come into the ownership of the property, besides the people who are part of the joint tenancy, they would be a tenant in common. You would have to deed that person into the joint tenancy. In other words, use the mechanism of deeding interest into all 3 or 4 people. However, many owners are coming in. Otherwise, the new owners are considered tenants in common. People love the Joint Survivor titling of property because automatically, the property goes to the other person without courts and without anything else.Real property is property that is real estate and has land to it or is on leased land. Click To Tweet
Joint tenancy is probably the most popular and you do not have to be married or have a domestic partnership. For example, if you want to put your property in the title of you and your sister, you and your child, you and a friend, which I wouldn’t recommend, you and someone close and you’re trying to avoid probate, this is a good way to do that. I’ll talk a little bit about why it might not be good for married couples but if you want to avoid probate, holding title in joint tenancy is a way to do that. It could be between parent and child. That way, when the parent passes away, it automatically goes to the child with no probate and no claims to the property. In other words, if your tenants in common with your child, that child could actually sell the property to someone else, their ownership in the property. When I get to tenancy in common, I’ll explain that more. Joint tenancy cannot be broken and it avoids probate. This is a good way to do this.
Now, if you get divorced, you’re going to want to retitle the property because you don’t want to be joint tenants with your previous spouse. Usually, that gets the property gets retitled into either tenancy in common or maybe one spouse pays out the other, so there’s no more co-ownership. You want to be careful with joint tenancy because it is one ownership. It’s not separable. If a new purchaser comes in, the new purchaser would be a tenancy in common unless the joint tenancy is rewritten to include now three people in the joint tenancy and the last survivor owns the property. Let’s say there are three people who are joint tenants, it’s husband and wife and a child. One of the parents passes away, the remaining parent and the child are still joint tenants.
There’s a form you file, and that’s all. It’s simple. What if the second parent passes away? Automatically, the child has 100% ownership of that one title. It avoids probate, however, you would lose the step up and basis if you’re married and I’m going to talk about that when we get to community property with right of survivorship. With joint tenancy, you lose that. It’s pretty important for taxes and income tax and so on. That was a joint tenancy. That’s one ownership. You cannot sell your part of the property so it protects people against that if people decide that they’re getting divorced and decide to flip the property to their kid, new girlfriend or someone to wreak havoc, it’s not going to do that. You can avoid that so they can’t sell off their portion.
We started with community property. In the state of California, if you say nothing to your title, whether it’s your car or your house, or any other thing that you would title, community property is understood because we’re in a community property state. In joint tenancy, you actually have to title the asset in the words joint tenancy. Some people, you’ll even see it like on a bank account. You’ll see some short letters, JTWROS, because that’s super long. Joint Tenancy with Right of Survivorship is a lot of characters to put on a bank statement. Oftentimes they’ll put those shortened letters, but that means that whoever is titled into this joint tenancy automatically without probate will get the asset into their name when the other people pass.
Combination Of Both
Beware if you’re getting divorced or thinking you might get divorced, that’s not the right titling to have on your property. The next section is a combo. I love combos. Community Property with Rights of Survivorship is the best of both worlds. In community property, if one of the people passes away, there is probate unless there’s a family trust or something like that, in which case you wouldn’t be community property. The property would be deeded in the name of the trust. If you don’t have that, community property means you’re going to go through probate. Community property is good for real estate because when the first spouse passes away, the property’s value is stepped up and basis. Let’s say you bought your home for $150,000. When one of you passes away in the marriage and the property values now at $600,000 and the second spouse passes away, the property value is now at that $600,000.
If you sell it, you don’t owe as much tax. If the spouse wants to sell the property, they would not have to count all that equity from $150,000 to $600,000. Now it just got wiped out as far as the taxation goes. That value at the time of death is $600,000. Let’s say the remaining spouse sells the property for $800,000. They’ll only pay tax on that little bit of difference. That’s a huge benefit and if you’re joint tenants, you lose that. A lot of married couples will hold a title as community property with rights of survivorship. That’s because the community property thing allows the value of the property for capital gains or taxation purposes gets stepped up at the time of death. The right of survivorship means there’s no probate. It’s like the best combo because you get to step up and basis and you get to avoid the probate if you haven’t put the property in the name of your trust. Having your property in the name of a trust is probably the best way and we’re not going to cover that.
We have a question, “My house is solely in my name. Does my house automatically go to my spouse?” No. If your property is solely in your name, it’s going to go to whoever your heirs are. If right now, your heir is your husband, he would be first. Let’s say you have no husband, there is a process in California where there are the priorities of heirs. If you don’t say anything on the title to your home or your car or whatever, the state of California has an order in which people inherit. What happens is, if it’s your spouse, the state of California says, “The spouse is heir number one. Children are heir number two. It goes across to siblings, siblings or heir number three.” If you’re married, unfortunately, you would be putting your spouse through the trouble of probate, which is not good because that can take a while. You have to do publishing. You have to file things about what the property’s worth.
You want to deed the property into either a living trust, in which case you say, “I want the property to go my kids. I want the property to go to my spouse,” or whatever it is but that avoids probate. Probate is expensive and it’s slow. Why would you put someone through that if you can avoid it? Titling your property is important, if you want it to go to a particular person that’s not in that chain. For example, I have clients that they want to give a certain asset to their sister, but their sisters are like the royal family. The sisters are way down the line so if you want to particularly give one asset to someone who’s not ranked high but you want to make sure they get it, you definitely want to title that asset into their name and yours or much better put it in your family trust and your living trust. Make sure that your wishes are followed that way and avoid probate. I’ve seen it too many times when people pass away that assets are given to the wrong people because the person didn’t actually make their wishes clear in a trust.If you hold property in community property, both owners have equal management and control of the property. Click To Tweet
Let me give an example of community property with right of survivorship. If you bought a house for $150,000 and it’s now worth $600,000 when you pass away. Your spouse wants to sell it to pay for college, have a trip around the world or whatever it is. They now won’t pay tax because it steps up in basis to that $600,000 and they pay the difference between that $600,000 and whatever they sell it for. The right of survivorship means that automatically there’s no probate and everything is clean. That typically is going to be for husband and wife or domestic partnerships that are recognized by the state that you’re in as a legal entity. It’s not only that you’re living together and you’ve been together a certain amount of time. That doesn’t count you have to be registered as domestic partners.
Upon the death of the co-owner, it goes to the first owner. That’s in community property with right of survivorship. We’re assuming that it’s two people because it’s a marriage. In joint tenancy, you can have many owners, so it’s upon the death of the last joint owner that the sole survivor has full possession of the property. We’re not talking about creditor’s claims. We’re going to talk about that another time but be aware that when you co-own a property with someone, all their legal issues and debts can attach to the property. If that’s something that you worry about, especially people who decide it’s brilliant to put their kids on the title, not brilliant. When we’re younger, we tend to have more baggage and we make more mistakes. That is especially clear that it would be better to have your property in the trust.
Tenancy In Common
We talked about community property, joint tenancy, it could be anybody who’s joint tenants and one ownership. We talked about community property with rights of survivorship, which is a married couple who wants to maintain the step up and basis but wants to automatically be able to avoid probate by the one ownership. The remaining spouse would get the property with no hassles. The last way I want to talk about is tenancy in common. This is for people who are not married and want to have percentage ownership. The best example I could give is, two or more people invest in a property, but they don’t invest equally. What that means is, I have $10,000 to put down and you have $40,000 to put down, so I’ll be a 20% owner. You’ll be an 80% owner in this rental property that we’re buying together.
Tenancy in common is a perfect way because as the property goes up in value, we have the same ownership. Hopefully, we have the same responsibility with the debts but we’ll assume for now that you’re buying a cashflowing property and there’s never any expenses, so it’s the ownership of the asset is divided up in percentages. What if you have four couples buying a nice home in Palm Springs to share as a vacation home? That’s a great idea but the more people you have involved, the more difficult it can be. What if someone wants out? Someone goes into it thinking, “I want to co-own a house in Palm Springs,” and they decided, “No. I want a big bare home instead,” and they demand their money back. You want to be clear about your arrangements with people.
The tenancy in common is the way to own different percentages. If you’re looking at owning things with people who aren’t your spouse, that’s a great way to do it. However, there are a lot of potential problems. Since each co-owner owns a separate legal title, the 20%, 80% or maybe it’s 25%, 25%, 25%, 25%. Those are all separate ownerships, which means that each person can will it to their kids or to their heirs. Imagine one day, you and your buddy buy a property in Palm Springs together. The property has gone up in value. You’ve been using it. It’s wonderful and then all of a sudden, you are diagnosed with something. You know you’re going to pass away. Now, your heirs are going to be co-owners with your buddy that you bought this property with, let’s say 40 years ago.
There can be more and more problems because what if your buddy has three or four kids and you only have two kids or vice versa, you can see that ownership can get more complicated. What if you started with my suggestion or my scenario where you had four co-owners with spouses and with children, this gets complicated. What you’re going to do tenancy in common, you definitely want to have a clear understanding of what the rules will be to get out of the deal and who can transfer to what. Be careful with this. It’s almost better to have a legal partnership that owns the property with all the legalities spelled out but you want to seek legal advice and accounting advice when you’re doing any kind of co-ownership with someone other than your spouse or even your children. You want to run this by an attorney. Everything should be run by an attorney when you’re talking about ownership. This is for two or more people. The ownership can be divided into any number of slices you might have heard of TICs, tenancy in common can be abbreviated into TICs.
When property values back in 2007 and were going up high like they are now. People were exchanging or selling their rental properties to buy more rental property. They’d run out of time in their exchange and so at the last minute, they would buy into real estate. Let’s imagine a commercial building in Texas, where they would own a 0.05% ownership. It would be like a $40 million property, and they only put in $500,000. That’s a big chunk of money and they were co-owners with 50 to 100 other people. You want to be careful what kind of TIC you are doing because those kinds of TICs are extremely hard to get out of because they’re not liquid at all. If you’re one of 100 owners, it’s hard to find someone else to buy into your ownership of that building.
Each owner’s interest can be conveyed to other owners. Let’s say I decide to sell it. As I was mentioning, some properties are super difficult to sell or tenants in common ownership are super difficult to sell to someone else but a 25% ownership in a Palm Springs property may not be difficult. If you’re your tenant in common and there are three others and one of your co-owners decides to sell their portion, you may not like that co-owner so be careful when you go into a tenancy in common ownership. Also, if someone dies, it passes to their heirs, so you want to be careful of that because now you might co-own a property with four siblings of the decedent’s household. The other thing is, the creditors can come after it. Let’s say you own a property in a tenancy in common with three other couples, let’s say. Again, the house in Palm Springs as the example and one of your co-owners files bankruptcy, those creditors actually would have a claim against that person’s 25% ownership.
Tenancy in Common, in my opinion, is fraught with potential problems and big problems. If you’re going to own property, it’s super important to examine the ways to hold the title. It’s easy when you’re married, but if you defaulted to community property, you might not know that you have to go through probate to get the property into your name. Maybe you want to sell it when your spouse passes away and you didn’t know that you were community property. All of these have potential problems. Mostly, I work with a lot of investors that want to hold property in the tenancy in common and that can be fraught with a problem.
I hope this little Mortgage Monday was helpful. It’s longer than normal but I’m hoping I can help you avoid problems in the future by picking the right titling of your property and making sure you understand what you’re doing. I look forward to seeing you next week on Mortgage Monday. Thursday and Friday, we’re having investors corner for both days. Thursday will be with a lady who will explain to us what cost segregation is, which is putting depreciation on to hyperspeed so you could save even more on taxes. You will love that talk. It’s getting depreciation in 3 years instead of 27 and saving a lot on taxes.
On Friday, bring all your tax questions because I have one of the most interesting real estate, investors and CPA. He’s an expert in all things to do with being self-employed, investing in real estate and all the tax consequences. Richard Welling will be updating us on the new tax law, how you’re going to save money, how you can save money, get ready for the year with your paperwork so that the next year you have good looking tax returns. It’s mostly for my investor crowd, its Investors Corner, but anyone can learn from this talk with the CPA. Thanks for joining me on Mortgage Monday and I look forward to seeing you.