There are several ways to hold the title to a property.
Some are simple; some are complex. Each has its advantages
and disadvantages, so you have to decide which one is right
for you.
In the first part of this article, I'll describe the most
common forms of title holding and the advantages and
disadvantages of each. Sole Proprietorship This is most
common form of ownership.
All you need is a title of the property vested in your name
(or other designated person). A sole proprietorship has
several advantages: It's the easiest and cheapest form of
ownership. You have complete control and decision-making
power over the business.
The sale or transfer of property can take place at your
discretion. There are no corporate tax payments. There are
minimal legal costs to forming a sole proprietorship. There
are few formal business requirements.
As with any form of title holding, a sole proprietorship
also has its disadvantages: You can be held personally
liable for the debts and obligations of the business. This
means you have no protection against lawsuits or other
claims. All responsibilities and business decisions fall on
your shoulders. There are no significant tax advantages.
All your income and expenses are reported directly on your
personal tax return. In the event you die, there is no
favorable tax treatment or avoidance of probate.
Joint Tenancy
This is a form of ownership by two or more individuals
together. It's different from other types of co-ownership
in that the surviving joint tenant immediately becomes the
owner of the whole property upon the death of the other
joint tenant. This is called a "right of survivorship."
A joint tenancy between a husband and wife is known as a
tenancy by the entirety. This form has some characteristics
different than other joint tenancies, such as the inability
of one joint tenant to sever the ownership and differences
in tax treatment.
A joint tenancy requires a unity of time, title, interest
and possession. "Unity of time" means that all the joint
tenants must take title by the same deed at the same time.
Each tenant must own an equal interest or percentage of the
property. So, if you have two joint tenants, they each own
50%; three joint tenants 331/3%; and so forth.
If the percentage or interest is unequal, then it's not a
joint tenancy. By law, each joint tenant is entitled to the
right of possession and can't be excluded by the others.
A judgment lien or bankruptcy can terminate a joint
tenancy. A new joint tenant can be added by executing a new
deed.
Here are the advantages of a joint tenancy:
You get a stepped-up basis on your deceased joint tenant's
portion of the property. "Stepped up" means that the
taxable basis is increased for the portion of the property
owned by the deceased joint tenant to the current market
value at the time of death. This means that the surviving
joint tenants may be able to sell the property with much
lower taxes.
Married couples often hold title to investment properties
in a joint tenancy. If one spouse dies, this can result in
a step up in basis to the fair market value at the time of
death rather than just a step up for the portion owned by
the deceased joint tenant. Laws on this subject vary from
state to state and may include additional options.
There are also disadvantages to a joint tenancy: The
co-owners may disagree or quarrel. If they do disagree, an
expensive and time consuming law suit may be required for
the original owner to exercise his or her intentions for
the asset. If an asset is owned prior to marriage, the
original owner may lose part of the asset in a divorce. A
jointly owned asset will be subject to judgments against
every owner and may be lost in the bankruptcy of any owner.
The financial management advantages of trusts are
eliminated, especially where aged parents or minor children
are involved, as are the possible tax-savings features of
trusts and estates.
Assets may not be available to the executor of a deceased
joint owner's estate. In such a situation, it may then be
necessary to sell other assets, possibly at a loss, in
order to meet tax payments or other cash needs to settle
the affairs of the deceased. The one who originally owned
the property, and subsequently places it in a joint
tenancy, is no longer the sole owner.
If the original owner later desires to dispose of the
property, in many cases he or she can sell only his or her
part interest unless the other joint tenants agree and
cooperate. If both joint owners die in a common accident or
disaster and it cannot be determined who died first,
serious legal problems and an increase in the cost of
probate may result.
If a conservator is appointed for the original owner, the
probate court's authority may be required to use the asset
for that owner, increasing the cost of the conservatorship.
If minors or legally disabled adults are involved,
expensive conservatorship proceedings may be necessary.
Tenancy in Common
This is an arrangement in which several owners each own a
stated portion or share of the property. It has the
following advantages: Each owner can own a different
percentage, can take title at any time, and can sell his or
her interest at any time. If you're an owner, you also have
complete control over your part of the property and can
sell, bequeath or mortgage your interest as you decide
without any need for permission of the others. Upon your
death, your share becomes part of your estate, and you can
will it as you see fit.
Here are the disadvantages:
If another owner dies, you may find that he or she has left
their interest to someone you dislike or can't get along
with. Another owner can sell or borrow against his or her
property. This can create conflicts.
Financial difficulties of another owner or owners can badly
affect your interest in the property. If an owner had a
judgment leveled against him or her, it could lead to
foreclosure on their interest in the property. Or a
bankruptcy proceeding could order the forced sale of the
property to satisfy creditors, unless you and the other
owners are willing to pay off the creditors and buy out the
owner in question. Different owners may have different
plans for the property. This can lead to strife among the
tenants in common. Some may want borrow money using the
property as collateral; others may want to sell the
property, etc. If no one can agree, a business feud can
erupt into legal action and the resulting nastiness and
expense.
In the next part of this article, I will discuss more
choices.
Jack Sternberg
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Jack Sternberg is a nationally recognized expert on real
estate investment who's been in the business for more than
30 years. Sternberg's deals have totaled over $750 million
and he's been to the closing table more than 1,500 times.
For more, visit http://www.askjacksternberg.com
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