Q: What are the differences between some common forms of property ownership?
There are a variety of ways that one can hold title to property:
Sole Ownership: owned entirely by one person. Words in the deed such as “Bill, a single man” establish title as sole ownership.
Tenants in Common: a form of co-ownership where property is owned by two or more persons at the same time. The proportionate interests and right to possess the property between the tenants in common need not be equal. Upon death, the decedent’s interest passes to his or her heirs named in the will who then become new tenants in common with the other tenants in common. Words in the deed such as “Bill, John and Mary as tenants in common” establish tenancy in common.
Joint Tenancy: a form of co-ownership where property is owned by two or more persons at the same time in equal shares. Each joint owner has an undivided right to possess the whole property and a proportionate right of equal ownership interest. When one joint tenant dies, his/her interest automatically passes on to the surviving joint tenant(s). Words in the deed such as “Bill and Mary, as joint tenants with right of survivorship” establish title in joint tenancy. This form of ownership is not available in all states.
Tenancy by the Entirety: a special form of joint tenancy when the joint tenants are husband and wife — with each owning one-half. Neither spouse can sell the property without the consent of the other. Words in the deed such as “Bill and Mary, husband and wife as tenancy in the entirety” establish title in tenancy by the entireties. This form of ownership is not available in all states.
Community Property: this special form of ownership between spouses is only available in “community property” states. Upon death, the decedent’s interest passes in a manner similar to tenants in common. Words in the deed such as “Bill and Mary, husband and wife as community property” establish community property ownership.
Trusts: While not technically a form of ownership, you may own real property through your Living Trust. Upon your passing, your interest would pass to successor trustees and/or beneficiaries you have designated in your trust.
Q: What is the difference between a cooperative and a condominium?
In a “condo” arrangement, you legally own a particular unit in a multiple unit structure of the building. Under a typical arrangement, you have a share and a right to use common areas such as hallways, elevators, gardens, swimming pools, and club house within that structure. You make monthly payments to an “association” for the maintenance expenses of the common areas. The association is typically run like a corporation with complaint and appeal processes to protect individual rights of owners and to provide a mechanism for resolving disputes within the community.
In a “co-op”, the ownership structure is quite different: you do not own your own specific unit in the building but own stock in the corporation that actually owns the building and all the apartments. You lease your apartment from the corporation according to a formula based on the unit’s size. As a shareholder, you have a say in electing the Board of Directors who manage the cooperative.
Q: What is the purpose of “recording” a deed?
When you purchase real property, you receive a written document called “the deed” which transfers the ownership of the property from the buyer to you as the purchaser. The deed gives you formal title in exchange usually for a specified amount of money. The transfer of interest in real property is not complete until the deed is delivered to you. The deed should be recorded immediately with the county clerk in the county where the property is located. By recording the deed, you give notice to all future potential buyers of that property that you now have an ownership interest in that particular piece of real property. Recording also tracks the chronological chain of ownership from a series of buyers and sellers. Before you purchase real property, a search is conducted at the county clerk’s recording office to confirm that the seller (as well as all previous sellers) has legal title to the property in question. Title insurance typically performs this function to determine whether any defects occurred in prior conveyances and transfers. If so, such defects may then be pointed out and excluded from their coverage.
Q: What tax advantage do I get by owning real property?
Mortgage interest deduction: The major advantage to owning real property comes from the deductibility of the interest of a home mortgage or a home equity loan. In order to qualify for an income tax deduction, the loan must be for your home or a vacation home that is not rented to others. The deduction must be taken as an itemized deduction in Schedule A of your federal tax return.
Property tax deduction: real estate taxes paid to any state or local governments are also deductible on your federal return. Generally, the taxes must be based on the assessed value of the real property and must be charged uniformly against all property under the jurisdiction of the taxing authority.
Capital gains exemption: Once you sell your residence, you may exclude up to $250,000 ($500,000 for married couples) from any realized capital gains. In order to qualify, you must meet certain requirements: among other things, you must have lived in that home for at least two of the five years prior to the sale, and not have excluded gain from the sale of another home two years prior to the sale.
Q: What is a quitclaim deed?
A quitclaim deed transfers or “releases” to the person acquiring the property whatever present interest the grantor has in that property. Unlike a grant deed, a quitclaim deed carries with it no express or implied covenants or guarantees. Therefore, if the grantor has no interest in the property, a quitclaim deed conveys nothing.
Q: Since my spouse passed away, I want to re-title my house so I own it jointly with my adult children. Is this a good idea?
While sharing title to property may avoid probate after your death, naming “joint tenants” may have a number of adverse consequences. In effect, adding a joint tenant to your home deed means that you have now gifted a portion of that property to those named. And when you make gifts in excess of $14,000 in value within a calendar year to someone other than a spouse, the IRS requires you to file a gift tax return, and in some cases pay gift taxes. When gifting an interest in your home to anyone, you also are endangering your own financial security. If your new co-owners have creditors or are involved in a divorce, your assets will be at risk. Furthermore, such a transfer may jeopardize certain property tax and other exemptions you enjoy as a senior, veteran, or homesteader.
A better idea is to create a Living Trust and name your children as beneficiaries of the Trust after you die. This has the advantage of avoiding probate, yet it gives you total control of your house prior to transferring ownership. You can also change beneficiaries if you so desire, and also provide for the circumstance if one child predeceases you.
Q: What is the “Closing”?
The closing is a final meeting of all the parties involved in the real estate transaction. Attorneys for buyer, seller and bank convene with sellers and buyers to sign and officially transfer title to the buyers. A representative of the title insurance company will also be present to facilitate the transfer of title. The title company is also responsible for recording the new deed.
Before arriving at the closing, the buyer should visit the property to assure that everything is in working order. That means turning on the heat and air conditioning and checking for leaks and other problems. After the closing any problem is the buyer’s responsibility. The buyer should also have all the necessary paperwork and certified checks for the seller and for various closing costs. Otherwise, if the mortgage, title, homeowner’s insurance and other documents required by law are not completed and brought to the closing table, the closing may be delayed.