Real Estate Title Holding - Part One

There are several ways to hold the title to a property. Some are simple; some are complex. Each has its advantages and disadvantages, so you have to decide which one is right for you.

In the first part of this article, I'll describe the most common forms of title holding and the advantages and disadvantages of each. Sole Proprietorship This is most common form of ownership.

All you need is a title of the property vested in your name (or other designated person). A sole proprietorship has several advantages: It's the easiest and cheapest form of ownership. You have complete control and decision-making power over the business.

The sale or transfer of property can take place at your discretion. There are no corporate tax payments. There are minimal legal costs to forming a sole proprietorship. There are few formal business requirements.

As with any form of title holding, a sole proprietorship also has its disadvantages: You can be held personally liable for the debts and obligations of the business. This means you have no protection against lawsuits or other claims. All responsibilities and business decisions fall on your shoulders. There are no significant tax advantages. All your income and expenses are reported directly on your personal tax return. In the event you die, there is no favorable tax treatment or avoidance of probate.

Joint Tenancy

This is a form of ownership by two or more individuals together. It's different from other types of co-ownership in that the surviving joint tenant immediately becomes the owner of the whole property upon the death of the other joint tenant. This is called a "right of survivorship."

A joint tenancy between a husband and wife is known as a tenancy by the entirety. This form has some characteristics different than other joint tenancies, such as the inability of one joint tenant to sever the ownership and differences in tax treatment.

A joint tenancy requires a unity of time, title, interest and possession. "Unity of time" means that all the joint tenants must take title by the same deed at the same time.

Each tenant must own an equal interest or percentage of the property. So, if you have two joint tenants, they each own 50%; three joint tenants 331/3%; and so forth.

If the percentage or interest is unequal, then it's not a joint tenancy. By law, each joint tenant is entitled to the right of possession and can't be excluded by the others.

A judgment lien or bankruptcy can terminate a joint tenancy. A new joint tenant can be added by executing a new deed.

Here are the advantages of a joint tenancy:

You get a stepped-up basis on your deceased joint tenant's portion of the property. "Stepped up" means that the taxable basis is increased for the portion of the property owned by the deceased joint tenant to the current market value at the time of death. This means that the surviving joint tenants may be able to sell the property with much lower taxes.

Married couples often hold title to investment properties in a joint tenancy. If one spouse dies, this can result in a step up in basis to the fair market value at the time of death rather than just a step up for the portion owned by the deceased joint tenant. Laws on this subject vary from state to state and may include additional options.

There are also disadvantages to a joint tenancy: The co-owners may disagree or quarrel. If they do disagree, an expensive and time consuming law suit may be required for the original owner to exercise his or her intentions for the asset. If an asset is owned prior to marriage, the original owner may lose part of the asset in a divorce. A jointly owned asset will be subject to judgments against every owner and may be lost in the bankruptcy of any owner. The financial management advantages of trusts are eliminated, especially where aged parents or minor children are involved, as are the possible tax-savings features of trusts and estates.

Assets may not be available to the executor of a deceased joint owner's estate. In such a situation, it may then be necessary to sell other assets, possibly at a loss, in order to meet tax payments or other cash needs to settle the affairs of the deceased. The one who originally owned the property, and subsequently places it in a joint tenancy, is no longer the sole owner.

If the original owner later desires to dispose of the property, in many cases he or she can sell only his or her part interest unless the other joint tenants agree and cooperate. If both joint owners die in a common accident or disaster and it cannot be determined who died first, serious legal problems and an increase in the cost of probate may result.

If a conservator is appointed for the original owner, the probate court's authority may be required to use the asset for that owner, increasing the cost of the conservatorship. If minors or legally disabled adults are involved, expensive conservatorship proceedings may be necessary. Tenancy in Common

This is an arrangement in which several owners each own a stated portion or share of the property. It has the following advantages: Each owner can own a different percentage, can take title at any time, and can sell his or her interest at any time. If you're an owner, you also have complete control over your part of the property and can sell, bequeath or mortgage your interest as you decide without any need for permission of the others. Upon your death, your share becomes part of your estate, and you can will it as you see fit.

Here are the disadvantages:

If another owner dies, you may find that he or she has left their interest to someone you dislike or can't get along with. Another owner can sell or borrow against his or her property. This can create conflicts.

Financial difficulties of another owner or owners can badly affect your interest in the property. If an owner had a judgment leveled against him or her, it could lead to foreclosure on their interest in the property. Or a bankruptcy proceeding could order the forced sale of the property to satisfy creditors, unless you and the other owners are willing to pay off the creditors and buy out the owner in question. Different owners may have different plans for the property. This can lead to strife among the tenants in common. Some may want borrow money using the property as collateral; others may want to sell the property, etc. If no one can agree, a business feud can erupt into legal action and the resulting nastiness and expense.

In the next part of this article, I will discuss more choices.

Jack Sternberg