Who Really Owns Your Home?

An Asian couple examining information on a laptop computer with the woman leaning her head on the man.

Before you decide how the title for your home will be held, you should explore all of your options and make sure you fully understand each.

How ownership is held will determine how the house will be treated in the event of death or divorce and the amount of taxes that might be incurred.

The manner in which you will take title to your new home has significant ramifications, so it’s wise not to leave that important decision to chance.

Generally, sales agents won’t ask how you’d like to title the property. Instead, they tend to insert the phrase “as above” on the line in the sales contract that asks who will be holding the property, referring to the person or persons whose names appear as the buyer.

Some — but not all — title attorneys or escrow agents will ask at closing how you’d prefer the title to read. But often that question isn’t posed until you sit down at the closing table, and by then it’s too late to give any real thought to your options.

Since how ownership is held will determine how the house will be treated in the event of death or divorce and the amount of taxes that might be incurred, you shouldn’t make snap decisions at a time when you are extremely stressed. It’s far better to look into your choices beforehand, when your head is clear and you can make sound judgments.

Remember that while your lender dictates whose names are on the deed, which is the legal instrument that conveys title to the property from seller to buyer, it is up to you to decide in what form the title is held.

So, with all that as a backdrop — and with the understanding that what follows is not legal advice, that laws vary from state to state and that you should consult an attorney versed in estate planning — here’s a quick overview on the various ways to hold a title:

Tenancy by the Entirety

In most cases, this is the way for married couples to hold title. In fact, it is only available to married persons. It creates an estate in which each spouse has an undivided interest in the property, or the equal right of possession and enjoyment during their joint lives. In other words, the two of you own the property as one.

It also vests each spouse with the right of survivorship so that if one passes away, his or her interest automatically transfers to the other. Since probate is not necessary on the death of the first spouse, the property won’t be tied up in court and can be sold right away, if that’s what the survivor wants.

In addition, for federal tax purposes, the survivor takes title to the share of the property attributable to the deceased at its “stepped up basis,” meaning its fair market value on the date of death.

Equally as important, individual creditors of either spouse cannot attach a lien on a property held as tenants by the entirety. So, if you are in an automobile accident and your insurance isn’t enough to cover a judgment against you, the creditor cannot look to the house to satisfy the claim.

Tenancy in Common

Under this alternative, each spouse owns a set, but not necessarily equal percentage, of the property. And each owner may sell or will his or her share without the permission of the owner.

Here again, the share owned by one spouse passes at its stepped-up basis upon his or her death. So, if the husband is very ill, it might be advantageous for him to hold a 99 percent share so that when he dies, his share transfers at its date-of-death value to his spouse. Then, if the wife should decide to sell shortly thereafter, there will be fewer capital gains to pay.

However, there is no creditor protection with tenancy in common. Whatever percentage one spouse owns, his or her creditor can get. So if she owns an 80 percent share, all 80 percent is vulnerable to her creditors. Only the other 20 percent is safe from her creditors, but exposed to his.

Another drawback is that there is no right to survivorship. That is, the decedent’s share vests in whoever is named in the will. Moreover, unless the deceased holds his share in trust, it must go through probate, just like the rest of his estate.

Joint Tenancy with Right of Survivorship

This is similar to tenancy by the entirety, except that the property is not protected from the individual creditors of either owner.

This might be a good option for parent and child owners, because one has the right of survivorship if the other passes away. And since it is more likely that the parent will die sooner than the child, it means the child will receive the parent’s share at its stepped-up basis.

Another advantage is that probate is unnecessary, so there are no delays or costs associated in transferring full title to the survivor. Generally, all the survivor has to do is record an affidavit of survivorship and a certified copy of the deceased’s death certificate.

However, regardless of what the deceased’s will says, his share will pass to the joint tenant. In other words, it makes no difference that a father who buys a house as a joint tenant with his daughter wants to leave his share to another offspring, say his son. The law says that under this form of ownership, his share will pass only to the joint tenant.

Also, all joint tenants are presumed to have an equal share. Consequently, no one owner will have a controlling share. And in many states, one co-owner can dissolve the joint tenancy without the other’s approval.

Sole Ownership

For the most part, unmarried buyers will take title as sole owner in his or her name. This is sometimes known as “ownership in severalty,” meaning the property is held individually rather than concurrently by more than one party.

This gives you complete control of the property. Furthermore, if you should marry later, your spouse does not automatically acquire ownership in this property. And if you should divorce later, your ex may still have no claim.

However, as a sole owner, you won’t have the benefits that come with other forms of ownership; that is, you won’t be able to avoid creditors or the probate process and the property will be considered part of your estate for federal estate tax purposes.

Trusts

There are all kinds of trusts, too many to discuss here. But the revocable living trust is probably the most common and useful for holding title to real estate. Here, you convey title to a trustee — who could be anyone, even yourself — who owns and manages the property on your behalf.

Community Property

A handful of states allow married persons to hold real estate as community property. In these locations, each spouse can hold as separate property all property ownered before their marriage or received as a gift or inheritance during their union. All other property received during the marriage becomes community property.

With community property, the signatures of the co-owners are required to transfer title. But distribution at death varies among the different states. Generally, though, either spouse can dispose of his or her share by will.

If the deceased leaves his half to the surviving spouse, she gets the entire house, not just half, at a new stepped-up market value. If there is no will, the survivor usually takes half of the decedent’s share and the other half goes to the deceased’s estate.

In the event of divorce, the test is not whose names are on the deed. Rather, it is whether community property funds earned during the marriage were used to pay for the house.

Also worth noting: When you move from a community property state to a common law state, all community property remains so. Conversely, if you move from a common law state to a community property state, separate property remains separate.

Lew Sichelman is a nationally syndicated housing and real estate columnist. He has covered the real estate beat for more than 40 years.

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