BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Manner of Holding Title
Q: When I represent buyers, they often ask me how they should take title. What should I tell them?
A: This is, of course, a concern for most buyers. But, essentially they are asking you for legal and tax advice which you cannot give them. You should advise the buyers to discuss this with their legal and tax advisors.
For your background information, here are some common methods for holding title:
1. Sole and Separate Property: An individual can hold title as his/her sole and separate property. However, if that person is married or a registered domestic partner, the spouse/partner likely has a community interest in that property. The title company is going to require a Quitclaim Deed from the spouse prior to COE.
2. Revocable Living Trust: Holding title in a Revocable Living Trust has several benefits including avoiding probate costs, court supervision, and public access to private information, as well as allowing the trustees to remove property from, or place property into, the trust at any time during the duration of the trust.
When title is vested in more than one person, a “co-tenancy” relationship is created. There are three types of co-tenancies:
3. Joint Tenancy: Joint tenants (“JT’s”) have equal shares in the property. Each JT has the right to possession of the entire property. In addition, JT’s have the right of survivorship meaning that when one JT dies, that JT’s share of the property is not part of the deceased JT’s probate estate, but belongs to the surviving JT.
4. Tenants In Common: This is the default position of a co-tenancy. Any interest in real property created in the name of two or more persons is presumed to be a tenancy in common unless otherwise stated. Like JT’s, each tenant in common has the equal right to possession of the entire property. But, unlike JT’s, the interests of tenants in common need not be equal. Each tenant in common can sell their interest, or even encumber their separate interest with a deed of trust.
It is not required to have a tenant in common, or TIC, agreement but is useful particularly with unrelated parties because, in managing the property, TIC owners are very much like a partnership. In some areas of the state (San Francisco in particular), ownership of a TIC interest is a method for unrelated individuals to buy into a fractional ownership of the entire building, with a TIC agreement setting governance rules and specifying that each owner has a right to exclusively occupy a unit.
It is possible to create various combinations of co-tenancies. For example, the deed could read: “Amy and Ben, joint tenants, a 40% interest, and Cyd a 60% interest.” So, as between Amy and Ben, they are joint tenants each owning ½ of their 40% interest; but, as between Amy and Ben on one hand, and Cyd on the other, they are tenants in common.
5. Community Property and Community Property with Right of Survivorship
Community Property: A married couple or registered domestic partners can hold property as community property. Community property is similar to JT in that the couple’s shares are equal, and there is also a right to possession of the entire property. But, there is no right of survivorship with community property unless specified in the deed (see below). With no right of survivorship, the deceased spouse’s portion of the property is transferred by trust, will or, if no will, through the intestate succession rules in the law.
Community Property with Right of Survivorship: This form of ownership, if so specified in the deed, combines the benefits of community property and JT. Upon the death of one spouse, the property passes to the survivor, without administration, basically the same as with property held in JT.
Tax Benefits: Perhaps the primary incentive to hold property as community property is a tax benefit. If spouses or domestic partners own property as community property, with or without a right of survivorship, then for both federal and California tax purposes there is a step-up in basis for the entire property upon the death of the first spouse. With other forms of holding title, such as JT or tenants in common, only one-half of the property is allowed a stepped-up basis.
For more information see CAR Legal Memo: “Transferring Title to Real Property” at:
http://www.car.org/legal/real-property-title/transferring-title-to-real-prop/
PRACTICE TIP:
1. Always refer your buyers to their legal and tax advisors with any questions regarding how to hold title, because how title is held can have both legal and tax consequences.
DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2014 8/29/14