One of the decisions that you will be asked to make as you are completing the purchase of a property, is how you are going to hold title to the property (the vesting). The vesting will appear on the Deed of Trust and the Grant Deed, which are recorded documents. Usually, your escrow officer or lender, or possibly both, will ask you how you want to hold title. The manner in which you hold title may have significant legal and tax consequences. Some of the issues that you should consider will be explored in this article.
Real property in California can be owned in either Sole Ownership or in Co-Ownership. There are three options for holding property as a Sole Owner.
- A Single Man or Woman, defined as a man or woman who has never been married.
- An Unmarried Man or Woman, defined as a man or woman who has been married in the past, but is now legally divorced or is widowed.
- Married Man/Woman, as His/Her Sole and Separate Property, defined as a married man or woman who wishes to acquire title in his or her name alone.
In California, any assets that are acquired during marriage become community property, (i.e., belonging to both spouses), unless they are specifically acquired as separate property. Real property that is conveyed to a married man or woman is considered community property, unless it is stated otherwise. In order for a married individual to acquire title in his or her name only, the spouse must relinquish all right, title and interest to the property. Usually, this is done by executing a Quitclaim Deed to the property, which is recorded concurrently with the deed to the property.
For residential property, the primary methods for holding title are Community Property, Joint Tenancy, and Tenancy in Common. Tenancy in Partnership and Revocable Living Trusts will not be addressed in this article.
- Community Property
When the title to property, is held by a married couple, as community property, each spouse has equal rights of management and control of the property and the right to include half of the community property in his or her will. If the first spouse dies without a will or leaves the property to the surviving spouse, the property will go to the surviving spouse and no probate is necessary. If a spouse exercises the right to leave one half of the property to someone other than the surviving spouse, that half is subject to administration in the estate.
With community property, on the death of the first spouse, both spouses' half interests in the property will get an income tax basis adjustment to fair market value. For example, if the property was purchased for $100,000 and is worth $300,000 at the time of the first spouse's death, the surviving spouse will get a stepped-up basis to $300,000 for tax purposes.
One issue to be aware of is that when property is purchased with one spouse's separate property, the separate property becomes community property. For example, suppose John and Mary purchase a house shortly after they are married. Mary provides the $20,000 down-payment from savings she accumulated prior to the marriage. If title to the property is held as community property, the $20,000 becomes community property. In essence, Mary has just given John a gift of 50% of the separate property, or $10,000. Similarly, if Mary's parents gave her a $20,000 gift to use as the down-payment on the property, these funds would also become community property.
- Joint Tenancy
The primary characteristic of joint tenancy is the right of survivorship. When one joint tenant dies, his/her interest in the property is equally distributed to the remaining joint tenants. The property does not become part of the individual's estate, so it does not have to go through probate. This means that the transfer of property is easy, but it also means that the individual cannot include the interest in the property in his/her will.
If unmarried individuals hold title as joint tenants and one owner dies, the property will automatically transfer to the co-owner. As with community property, any separate funds that were used to purchase the property become the property of the surviving owner.
Unlike community property, only the decedent's half interest in the property receives a basis adjustment. Using the example of a property purchased by a married couple for $100,000 which is worth $300,000 when the first spouse dies, the adjusted basis for the surviving spouse would be $200,000 ($150,000 for the decedent's half, plus $50,000 for the surviving spouse's half).
- Tenancy in Common
Under tenancy in common, the co-owners own undivided interests, but unlike joint tenancy, these interests are not necessarily equal. For example, three individuals could hold title jointly, with one person having a 50% interest and each of the other two having a 25% interest. Each co-owner can sell, convey, or mortgage his or her interest without the consent of the co-owners. The new owner simply becomes a tenant-in-common with the other owners.
When property is held as tenants-in-common, there is no right of survivorship. So unlike joint tenancy, the disposition of the property can be specified in the owner's will.
Before deciding how to hold title, you should consider your intent and what you want to happen to the property in the event of your death. If you are unsure how to proceed, consult with your attorney or tax adviser.