As you get ready to purchase your first home, you invariably hear the question, "How do you want to hold title to your property?" The answer can be complicated. This is one area where it pays to get sound advice from a qualified professional.
Irvine, CA (PRWEB) May 09, 2013
Home ownership in the U.S. fell to 65% in the first quarter of 2013 – the lowest rate since 1995, according to Robbie Whelan in Wall Street Journal Developments Blog. And as homeownership falls, so does the general public's understanding of everything that goes into purchasing a home. According to Wertz & Co., an Orange County accounting firm, one of the cloudiest areas for new homebuyers involves determining how to hold title to their property.
“As you get ready to purchase your first home, you invariably hear the question, ‘How do you want to hold title to your property?’” says Greg Tanner, a tax principal at Wertz & Co. “The answer can be complicated, and many real estate agents don’t have the knowledge or experience to help their clients fully understand the issue. This is one area where it pays to get sound advice from a qualified professional.”
For people buying a home in the state of California, here are some tips on the different types of ownership and when to apply them.
Sole Ownership. When the home will be owned by one person, the title will reflect sole ownership. This applies to a single person as well as a married person who will hold title as separate property.
Joint tenants with rights of survivorship. In this form of ownership, two or more persons share equal ownership and share the right to keep or dispose of the property. Holding title as joint tenants provides for the immediate and automatic transfer of title to a surviving spouse upon the death of the first spouse. Joint tenants are not allowed to pass along their interest to anyone through a will. With married couples, the issue of heirs is usually not a problem as their heirs are probably the same. But it can present a problem if each spouse has children from a prior marriage.
With joint tenancy, the surviving spouse owns the entire home without having to go through probate, a lengthy and expensive process. Under income tax rules, property received from a decedent receives a step-up in basis to the value at the time of death. This reduces potential taxes on the gain when the property is sold. However, with property owned as joint tenants, only the decedent’s portion of the property receives a step-up in basis.
Community property. Nine states, including California, have laws that dictate that each spouse owns one-half of the couple’s property. Upon the death of one spouse, one-half of the property is inheritable by that person’s heirs. The surviving spouse retains his or her half. The chief drawback of community property is that it does not provide automatic transfer to the survivor at death. The survivor must petition the court for a spousal property order, or initiate a probate proceeding. Another drawback is that the entire property becomes liable for the debts of either spouse. However, upon the death of the first spouse, the entire property receives a step-up in basis.
Community property with right of survivorship. This form of holding title combines the benefits of community property with those of joint tenancy. The couple gets the desirable tax features of community property and the right of survivorship of joint tenancy.
Trust. Revocable living trusts offer the big advantage of avoiding probate during the transfer of property on the death of the husband or wife. The terms of the trust supersede state law, and the community property will go exactly where the spouses want it to go. A trust provides many other benefits for estate planning and passing assets to heirs.
Tenancy in common. Property may be owned by two or more people, with each owner holding a percentage of ownership interest in the property. It is an undivided interest, and the percentages do not have to be equal. There is no right of survivorship with a tenancy in common, and the ownership may be left to any heir. This is not a common way to hold title to a residence, but is sometimes used for holding commercial property.
“There is no right or wrong way to title your property,” says Tanner. “It all depends on your marital status, how you want to pass on the property when you die, and other relevant factors. Be sure to study each option and pick the one that best fits your financial and home ownership goals.”
About Wertz & Company
Wertz & Company is an Orange County accounting firm that specializes in working with entrepreneurs and business owners along their journey to success. The firm offers accounting, financial planning, estate and wealth management planning, tax preparation, and other management consulting services in a personal, proactive, responsive manner. With a strong commitment to the local community, Wertz & Company contributes to several different charitable endeavors. For more information, visit http://www.wertzco.com.