Acquiring Real Estate: Different Ways to Hold Title
When you’re closing on the purchase of a home, the question of how to take title is an important one to answer correctly. As a Woodland Hills accountant and CPA, I regularly advise clients on the different ways of taking title and the financial impact they have. Below, I will outline the different ways to legally acquire real estate, but it’s always important to consult your lawyer or CPA to determine the best way to take title.
Sole Ownership or Ownership in Severalty
If you are single and buying real estate for yourself alone, you may choose to take title in your name only. This is called sole ownership or ownership in severalty. A married partner can also choose to have a sole ownership title. In this case however, the spouse would need to sign a quitclaim deed, which gives up any claims to ownership. This situation might come up if one partner flips homes for investment and wishes for the other partner to have no involvement in the business.
The main disadvantage of sole ownership is the lack of tax advantages, and high probate costs and delays in the case of the owner’s death.
Community Property
In community property states like California, real estate purchased by a married couple is automatically considered “community property,” and titled in both spouses’ names, giving each spouse a 50% ownership interest of the entire property. Something to know: if married couples do not specify another way of holding a title, the property will automatically be considered community property. With community property, there are several tax advantages, but the main one is that if a spouse should pass away the surviving spouse receives a step-up on the property tax basis. Furthermore, if you specify “community property with right of survivorship,” property ownership is automatically transferred to the other spouse without a long and costly probate court process (in lieu of a will that specifies some other arrangement).
Joint Tenancy
Joint Tenancy is defined in the California Civil Code as a joint interest owned by two or more persons in equal shares. The benefit to joint tenancy is that if one of the parties dies, the property automatically goes to the surviving joint tenant. That said, in the case of married couples, if you wish to ensure the right of survivorship, it is still generally best to take title as community property. The IRS may not allow the property to by-pass probate in the case of couples owning property as joint tenants rather than community property. Furthermore, the surviving benefactor would likely lose out on the community property tax benefits.
Tenancy-in-Common
Tenancy-in-common allows individuals or entities to acquire an undivided interest in a property with each owner holding a different percentage ownership in the real property. There is no right of survivorship, and if one of the tenants-in-common should pass, the ownership of the decedent’s interest will typically have to be determined in probate court.The tenants-in-common title prevents a surviving owner, in the event that one owner passes, from receiving a step-up in the income tax basis since, each owner, including the decedent, is considered to own his or her share separately.
If a disagreement arises and one party chooses to sell, each co-tenant is within his or her rights to legally file a partition action to force the sale of the property.
A Title in the Name of a Legal Entity, Limited Liability Partnership or Limited Liability Company
For those who flip home for a living, or for businesses buying a piece of property, the best way to take title is as a legal entity. This can take the form of a limited liability company or limited partnership. One of the main advantages of taking title as a legal entity is the ability to limit liability.
Potential liabilities for real estate owners can result in expensive legal battles and the loss of property assets. These might include tenant complaints and legal claims; mold claims; structural collapse of the real estate due to an earthquake or because of faulty construction; claims regarding recourse promissory notes secured by deeds of trust on the property and more. Some clients erroneously assume that they are protected against claims because of insurance. But owners should understand that if and when they sell their real estate, they are no longer covered under the liability clause and, thus, not covered for any future claims that might arise. Additionally, claims like the presence of hazardous materials may not even be covered under a policy.
Clients who own a lot of real estate should consider setting up a limited liability company or partnership to own the property. It is advisable to then divide properties among multiple limited liability companies or multiple limited partnerships in order to not have all your titles deeded to one partner if any legal liability does occur.
If you still have questions about how best to take title in California, my Los Angeles accounting office has the expertise to answer all of your concerns. Please feel free to give us a call at 818-593-6777 to set up a consultation. We’d be happy to help!
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