VARIOUS WAYS TO HOLD TITLE
How you choose to take title to your new home purchase depends upon your
specific needs and situation. The three primary methods of holding title are
Joint Tenancy, Community Property and Tenancy in Common. Following is a brief
description of each form of ownership.
JOINT TENANCY: The property is owned in common by two or more people,
with "right of survivorship". In other words, a deceased joint
tenant's interest passes automatically to the remaining joint tenant(s) without
having to go through probate. This process usually requires only the filing of
an Affidavit of Death of Joint Tenancy to satisfy the change of ownership.
Each person is deemed to own an equal undivided percentage interest in the
property, in common with the other co-tenants.
Each tenant may transfer his or her interest at any time, but to do so
severs the joint tenant's interest. The new co-owner will be a tenant in common
with the remaining joint tenants.
At the time of death, only the deceased's percentage interest in the
property acquires a "stepped-up" basis to its fair market value at
the date of the joint tenant's death.
Before moving on to the next form of ownership, let us discuss what
"step-up in basis" means. Let's assume for a moment that two joint
tenants acquire a piece of property worth $100,000. Each joint tenant is
assumed to own a $50,000 interest in the property. At the time of death of one
joint tenant, let us assume the property has appreciated to $200,000. Again,
each joint tenant is assumed to own a half interest or $100,000. Upon the death
of the joint tenant, the deceased's portion of the property "steps
up" to its current value (i.e.; $100,000). The value to the remaining
joint tenant is that should s/he sell the property, capital gain would be due
only on the increased value in their own portion . . . In this case $50,000
(the difference between the original $50,000 half value and the current
$100,000 half value of the remaining joint tenant). This can be confusing and you
may require tax counsel to clarify this aspect of ownership.
The step up in basis aspect of
holding title was more important in the past. Current tax rules exempt capital
gains to the extent of $250,000 for individuals and $500,000 for married
couples making the step up in basis mostly moot except for very high priced
COMMUNITY PROPERTY: The property is owned in common by a husband and
wife, usually acquired during the course of the marriage. Each spouse is deemed
to own an undivided one-half interest in the entire property (in some states
known as an interest in the entirety) in common with the other spouse.
Title can not be transferred separately, requiring both spouses to join in
the transfer via deed. In the event of the death of one spouse, the deceased
spouse's interest passes according to his/her will. In the absence of a will,
the entire interest passes to the surviving spouse. This transfer is typically
accomplished via probate. A probate proceeding can be lengthy and costly
depending upon the size of the estate. Living Trusts have become a popular
vehicle for retaining property and can circumvent the expense and time of a
probate process. You are advised to seek legal counsel regarding such trusts
and whether it is a vehicle that would benefit your specific circumstances.
The ENTIRE property acquires a step up in basis to its fair market value at
the date of the spouse's death. This is in contrast to Joint Tenancy in which
only the deceased's property interest is stepped up in basis. There are obvious
tax consequences related to this step up basis process and borrowers are
advised to seek legal counsel before selecting the method of holding title.
TENANCY IN COMMON: The property is owned in common by two or more
people without the right of survivorship. Each person is deemed to own a
divisible percentage interest in the property, in common with the other
co-tenants. This is typically the choice of ownership when several unrelated
persons purchase together. This is particularly true when the amount of dollar
investment from each owner varies as this is the only form of ownership in
which the co-tenants may own unequal percentages of the entirety.
Each tenant has a separate title interest that can be transferred separately
at any time by its owner. The new co-owner then becomes a tenant in common with
the remaining tenants in common. A deceased tenant's in common interest passes
via probate per the deceased's will or via the laws of intestacy.
Only the deceased's percentage interest in the property acquires a
stepped-up basis to its fair market value at the date of the tenant in common's
OTHER CONSIDERATIONS: While many borrowers select Joint Tenancy as
their method of holding title, there are other considerations besides the
avoidance of probate. Let us assume that one of the spouses is divorced or
widowed and has children from a previous marriage. Let's assume also that this
particular spouse has contributed at least one-half of the cash proceeds
necessary to purchase a home. Perhaps this spouse, upon his or her death, may
want his/her interest to be somehow divided among his/her children. In Joint
Tenancy ownership, the remaining Joint tenant (the husband or wife) would
"automatically" obtain the interest of the deceased spouse via the
"right of survivorship". This is but one of the considerations that
must be addressed when determining how to hold title.
A NEW FORM OF HOLDING TITLE: More recently, a new form of ownership
for married couples has become popular . . . Community Property with Right of
Survivorship. This form of title seems to provide the best of all worlds to
married couples. The remaining spouse can profit from the step up in basis for
the entire property value while also avoiding the long and sometimes costly
process of probate. For a more detailed description of this newer form of
title, see out tip sheet at:
Taking Title - A New Form
As indicated above, the form of ownership selected has many ramifications
beyond just tax consequences. Legal and financial advice is critical in making
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