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How To Hold Title To Real Estate

By Paul W. Samarin, Attorney at Law

This article is the second in a series of articles developed from my seminars entitled "Understanding Your Real Estate Transaction" and from nearly ten years' experience as a lawyer representing Buyers, Sellers and Realtors in various lawsuits. The purpose of this series is to give you the information you need about the decisions you are going to have to make before you have to make them. The goal is to have you make decisions in your best interest, rather than to do simply what you are told to do because you don't know what else to do.

Timing of The Title Decision

How you take title is a decision which you can change at any time if you have agreement of all record title holders. So, if you've already taken title to your home and find that a different method of holding title is preferable, you can change title if everyone on title agrees. You simply draft a new deed and get all the signatures in the presence of a notary, then record it. You cannot, however, put someone on title now and then take them off title later--unless they agree to be taken-off the title.

Obviously, there will be some costs involved with any change, so it would be better for you to get it right the first time. Therefore, you should decide before you close escrow so that the title company, the escrow officer and the lender can get it straight from the outset.

Separate Ownership vs. Co-Ownership

The first consideration is whether you will be purchasing in the name of one person or more than one. If two or more people will be buying the house, you will need to decide which form of co-ownership best suits your needs.

If one person is buying the home, there may be a benefit to having more than one person on title--such as loan qualification or probate avoidance--be careful, though, because there are also risks involved in this situation. Having people on title with you means that they have ownership rights to your property.

If there is one method which is best in any situation, co-ownership or separate ownership, married or single, that is to hold title by way of a Living Trust. Then the Living Trust will set-forth all of the other issues discussed in this article. To do this, of course, you have to first have a Living Trust drafted. (To learn more about Living Trusts, you may go to my article on "Avoiding Probate." Then use your back button to return to this article.) Because not everyone has a Living Trust, many people choose one of the other methods of holding title.

Co-Ownership Methods

The most common forms of co-ownership are: Joint Tenancy, Tenancy In Common and Community Property. Community Property is only available for a married couple. The other two forms are available for all people and any number of people. Most co-ownership involves two people, or two couples. Although it is possible for more people to be on title, it is not advisable.

Whenever you have many people owning real property together, you should form some sort of partnership entity (General Partnership, Limited Partnership, LLC, Corporation, etc.) and have the entity hold title. These matters are beyond the scope of this article so you should seek the advice of a competent real estate attorney whenever there are many people are buying together.

Joint Tenancy

This is the method most often recommended to most buyers. The two most important aspects of this method of holding title are: 1) each joint tenant has an equal share; and, 2) when any joint tenant dies, the remaining joint tenant(s) on title will become the owner(s) of the deceased person's share automatically--without any probate or other court involvement.

So, for example if my brother and my sister and I purchased a house together as Joint Tenants, we would each own a one-third interest. If I were to die, my brother and sister would then automatically own 50% each. They should then complete and record an Affidavit of Death of a Joint Tenant. This is a simple form which merely states that one of the joint tenants has died and that therefore the remaining joint tenant(s) is(are) the only remaining owners.

Even if I left a will stating that my share was to go to someone else, it would have no effect on the Joint Tenancy. My brother and sister still get my share. Therefore, if I own property as a Joint Tenant with someone, but I want to will my share to someone else, I must first expunge the Joint Tenancy with a new deed, and then will my share. For details on this, you must see a lawyer.

Community Property

If two people are married and the deed describes them as husband and wife, but does not specify how title will be held, the law in California will establish the title as Community Property--or you may choose this method if you decide it's best. Community Property is more than just a method of holding title, it is also a characterization of property as being owned by the community--which means the marriage. It will mean that the property rights and duties belong to the husband and the wife equally.

Many accountants will advise that a married couple should hold title as Community Property to take advantage of a "stepped-up basis." This used to be good advice, but now the IRS will allow this special tax treatment even in the case of a Joint Tenancy as long as the husband and wife acknowledge, in writing, that the home is a community property asset. For details on this, contact a competent real estate attorney. I do not recommend the Community Property method for most of my clients.

Tenants in Common

Whenever two or more people take title to property with a deed which does not specify how title is to be held, and does not describe them as husband and wife, the law will establish ownership as Tenants in Common. You can also choose to take title as Tenants in Common. Tenants in Common may own the property together in unequal shares--maybe I will own half and my brother and sister will each own one quarter.

If I die, my brother and sister will now have to wait for a Probate Court to determine who gets my share--even if I have a will, and even if I will my half to them.

What If I Need a Co-Signer?

If a bank requires you to have an additional person (or persons) on the loan to qualify for the payments, they are also going to require the same person(s) to be on title as co-owner(s). Remember, all parties on title will have the same ownership rights. Further, if my brother is on title because he co-signed for me, but then he gets sued for a million dollars, his half of my property is at stake in that lawsuit!

Sometimes a person will agree to co-sign for you to get the loan, but wants to be "taken-off" after you buy the house. A person can be "taken-off" the title, but cannot be "taken-off" the loan without the bank's approval--and they will never give their approval unless you refinance. If you co-sign for someone, never agree to be removed from title unless and until the loan is refinanced without you.

Another critical point which no-one will tell you: Because the lender requires your co-signor to be a co-owner, he is also going to be a co-signator to the escrow instructions. In the event that there is a cancellation of the escrow instructions, escrow may write the refund check payable to all the co-buyers even if it was your deposit money. Be certain to have an instruction in the beginning, that if the escrow is cancelled, the deposit belongs to you and not the co-signor.

What's Best For Me?

Of course I cannot advise you without knowing your specific situation. However, some general rules apply. The best situation is probably a Living Trust. If you don't have a Living Trust, then:

If you are going to own property with someone, but don't want them to get your share when you die, you should own as a Tenant in Common, not as a Joint Tenant, and please live a written will.

If you are married, you should probably own as Joint Tenants with your spouse. Remember, though, to sign a separate statement acknowleding that the property is a community property asset so that you can take advantage of a tax benefit called a "fully stepped-up basis."

If, however, I'm married, and own my property as a Joint Tenant with my wife, but I decide to will my half to someone else, I can expunge the Joint Tenancy by deeding my half back to myself and then will my half to anyone I choose--all without my wife's knowledge or consent. This is something that is not possible with a Community Property title because both husband's and wife's signatures are required to change the title. Please don't try this without the advice of a real estate attorney.

If you and your spouse are buying property with another couple, a vacation home, for example, you might take title as Paul and Paula Smith, husband and wife as Joint Tenants to a one-half interest as Tenants in Common with Pat and Patty Jones as Joint Tenants to a one-half interest. Now when Paul Smith dies, his wife gets his share, automatically and without probate, and owns half of the property with the Joneses owning the other half. Again, you should seek the advice of a competent real estate attorney before entering into this joint ownership arrangement.

As you can see, each form of ownership has its advantages and disadvantages. For over ten years, I've been in the unenviable position of advising folks as to how they should have taken title. If only they had taken the time, as you now have, to learn about the various forms of ownership before they bought, they might have saved so many dollars and so many troubles.

I'm glad you have taken the time to learn a little before you buy.

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