When buying new properties, such as a home or an apartment building, a lot of people contemplate on whether they should hold title as joint tenants, tenants in common, community property, limited liability company (LLC), or Trustee of a Trust. Below are the pros and cons of each type of holdings.
Joint Tenancy is when everyone holds equal interest in the property, however the interest is undivided, meaning that each spouse is entitled to use the entire property. This includes a right of survivorship, thus, when one spouse dies, his interest automatically passes to his surviving spouse. The surviving spouse owns 100% of the property.
A joint tenancy can be broken if one of the owners transfers or sells his or her interest to another person. This would change the ownership to a tenancy in common.
Tenants-In-Common is almost exactly the same as a joint tenancy, but everyone may have different ownership interests. For instance, you could hold title with 75% interest and your partner could hold title with 25% interest.
Tenants in common can be broken if one or more co-tenants buy out the others, the property is sold and the proceeds disbursed, or a partition allowing an heir to sell his or her stake.
The positive aspect about these two types of holdings is that it allows the property to pass to the survivors without going through probate.
The negative aspect about these two types of holdings is that if your spouse or partner dies and and the property is sold, there will be capital gains tax. For instance, if you own 75% of the property and your partner owns 25%, when your partner dies, you will inherit the 25% interest as well. Upon the sale of the property, you will be subject to capital gains for the 75% you owned originally. The 25% you inherited will be stepped up to fair market value.
Community Property is when each party has equal rights to the property. Each spouse has a right to pass on his share to whomever he or she wishes on a written will. In a community property state(Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), a spouse is typically entitled to some of the community property when the other spouse dies without a will. However it is still dependent on whether there are surviving children of the deceased spouse.
A good thing about holding titleto an apartment buildingas community propertyin one of the community property states, the tax basis of the ENTIRE asset is stepped up to fair market value. If you sell the inherited property, you will not be subjected to capital gain tax from purchase date, but only from the date someone’s spouse or partner dies.
Limited Liability Corporation (LLC) provides protection from liability, which means that the members of the corporation are not personally liable for all debts and lawsuits that incur. On the other hand, LLCs are usually subjected to self-employment taxes as well as yearly fees and updated paperwork to keep the LLC active.
A Trust is a legal arrangement where a property is transferred by a grantor to a trustee, who manages the property for beneficiaries. Generally, however, a trust is not an entity that can hold title in its own name. Title is usually held in the trustee name. For instance, if Amanda Banes is the trustee of the Banes Family Trust, title would read as Amanda Banes trustee of the Banes Family Trust.
Advantages of a trust include avoiding probates and full control of the property. Some disadvantages include the fact that it is costly to establish and maintain.
Overall, there are advantages and disadvantages to holding title as either joint tenancy, tenants in common, or community property. It is important to consult with a lawyer and or accountant to find out the best choices for your particular situation. If you have any real estate questions please contact us.
The information above should not be deemed reliable. Reader to do their own due diligence in regards to the topic presented above. Please consult with your lawyer or accountant.