How you choose to take title to your new home purchase depends upon your specific needs and situation. The three primary methods of holding title are Joint Tenancy, Community Property and Tenancy in Common. Following is a brief description of each form of ownership.
JOINT TENANCY: The property is owned in common by two or more people, with “right of survivorship”. In other words, a deceased joint tenant’s interest passes automatically to the remaining joint tenant(s) without having to go through probate. This process usually requires only the filing of an Affidavit of Death of Joint Tenancy to satisfy the change of ownership.
Each person is deemed to own an equal undivided percentage interest in the property, in common with the other co-tenants.
Each tenant may transfer his or her interest at any time, but to do so severs the joint tenant’s interest. The new co-owner will be a tenant in common with the remaining joint tenants.
At the time of death, only the deceased’s percentage interest in the property acquires a “stepped-up” basis to its fair market value at the date of the joint tenant’s death.
Before moving on to the next form of ownership, let us discuss what “step-up in basis” means. Let’s assume for a moment that two joint tenants acquire a piece of property worth $100,000. Each joint tenant is assumed to own a $50,000 interest in the property. At the time of death of one joint tenant, let us assume the property has appreciated to $200,000. Again, each joint tenant is assumed to own a half interest or $100,000. Upon the death of the joint tenant, the deceased’s portion of the property “steps up” to its current value (i.e.; $100,000). The value to the remaining joint tenant is that should s/he sell the property, capital gain would be due only on the increased value in their own portion . . . In this case $50,000 (the difference between the original $50,000 half value and the current $100,000 half value of the remaining joint tenant). This can be confusing and you may require tax counsel to clarify this aspect of ownership.
The step up in basis aspect of holding title was more important in the past. Current tax rules exempt capital gains to the extent of $250,000 for individuals and $500,000 for married couples making the step up in basis mostly moot except for very high priced homes.
COMMUNITY PROPERTY: The property is owned in common by a husband and wife, usually acquired during the course of the marriage. Each spouse is deemed to own an undivided one-half interest in the entire property (in some states known as an interest in the entirety) in common with the other spouse.
Title can not be transferred separately, requiring both spouses to join in the transfer via deed. In the event of the death of one spouse, the deceased spouse’s interest passes according to his/her will. In the absence of a will, the entire interest passes to the surviving spouse. This transfer is typically accomplished via probate. A probate proceeding can be lengthy and costly depending upon the size of the estate. Living Trusts have become a popular vehicle for retaining property and can circumvent the expense and time of a probate process. You are advised to seek legal counsel regarding such trusts and whether it is a vehicle that would benefit your specific circumstances.
The ENTIRE property acquires a step up in basis to its fair market value at the date of the spouse’s death. This is in contrast to Joint Tenancy in which only the deceased’s property interest is stepped up in basis. There are obvious tax consequences related to this step up basis process and borrowers are advised to seek legal counsel before selecting the method of holding title.
TENANCY IN COMMON: The property is owned in common by two or more people without the right of survivorship. Each person is deemed to own a divisible percentage interest in the property, in common with the other co-tenants. This is typically the choice of ownership when several unrelated persons purchase together. This is particularly true when the amount of dollar investment from each owner varies as this is the only form of ownership in which the co-tenants may own unequal percentages of the entirety.
Each tenant has a separate title interest that can be transferred separately at any time by its owner. The new co-owner then becomes a tenant in common with the remaining tenants in common. A deceased tenant’s in common interest passes via probate per the deceased’s will or via the laws of intestacy.
Only the deceased’s percentage interest in the property acquires a stepped-up basis to its fair market value at the date of the tenant in common’s death.
OTHER CONSIDERATIONS: While many borrowers select Joint Tenancy as their method of holding title, there are other considerations besides the avoidance of probate. Let us assume that one of the spouses is divorced or widowed and has children from a previous marriage. Let’s assume also that this particular spouse has contributed at least one-half of the cash proceeds necessary to purchase a home. Perhaps this spouse, upon his or her death, may want his/her interest to be somehow divided among his/her children. In Joint Tenancy ownership, the remaining Joint tenant (the husband or wife) would “automatically” obtain the interest of the deceased spouse via the “right of survivorship”. This is but one of the considerations that must be addressed when determining how to hold title.
A NEW FORM OF HOLDING TITLE: More recently, a new form of ownership for married couples has become popular . . . Community Property with Right of Survivorship. This form of title seems to provide the best of all worlds to married couples. The remaining spouse can profit from the step up in basis for the entire property value while also avoiding the long and sometimes costly process of probate.