By MIKE HEAYN
When acquiring a property, knowing how to take title can save a lot of heartache down the road. The variety of vestings can have a variety of consequences, including legal and estate planning issues. California, along with several other states, is known as a “community property state.” Community property means anything you or your spouse own is assumed to be held in shared ownership by both of you. Title can be taken several different ways. Sole ownership, tenancy in common, joint tenancy, and an entity are the most common vestings today.
If you were to purchase a property as your personal residence you would most likely take title as a sole owner. Taking title as a sole owner can leave you vulnerable to liability.
Other options exist such as a trust, which will be described later. As a sole owner you dictate when the property is refinanced or sold.Also,for estate purposes,you can will the property to whomever you want. This type of transfer can have tax consequences that should be discussed with a professional.
Recently, a popular way to take title is tenancy in common (TIC). TICs, as they are known by many real estate professionals, allow several owners to hold different percentages of a property. In a TIC, shares are owned by multiple owners, called “tenants.” For example, five friends could own an apartment building and have their names on title in a TIC relationship, with each friend owning a share that is proportional to the amount of down payment they contributed. For estate planning purposes, your interest or shares may be divided or gifted however you feel fit. Another benefit to some individuals is that your spouse does not automatically gain your shares in the event of your death. Rather, your heirs receive the ownership interest. On the flipside, partners transfer or sell their interest without the permission of the remaining owners.
If owning a property equally with another person, such as your spouse, interests you then taking title as “joint tenants” is the way go. In the event of your death, the other joint tenant receives your interest in the property. However, it is good to know that all of the joint tenants have to agree if they want to sell or refinance the property.
Placing a property in an entity is a common way to structure ownership in most commercial real estate. As mentioned earlier, some individuals choose to place title in a trust.A trust is a type of entity that allows a specific person known as a trustee to gain interest in the property. If done correctly, a trust can mitigate estate taxes saving your heirs a lot of time and money upon your death or other triggering event.
Other entities that exist are LLCs, corporations, limited partnerships and general partnerships. Of the other entities, LLCs need particular mentioning due to their popularity. LLC stands for “limited liability company.” Designed to protect the owners of a property, an LLC is structured so that there are managing members who control the actions of the LLC. Members, who invest money into the LLC, are only limited to losing the amount of money they invest. LLCs can be set up in thousands of different ways but ultimately are used to protect the owners against liability. LLCs also allow certain pass-through tax benefits that other entities may not allow. In today’s real estate market many investors will form one LLC for each property. This ensures that should an LLC go through litigation and lose its interest in a property, the investors will only lose that specific property and not an entire portfolio.
Holding title in the correct form can help you plan for your estate, protect your heirs from taxes and protect you from liability. Several different ways exist to hold title and you should explore which best fits your unique situation. (Mike Heayn is a Washington Mutual multi-family loan consultant. He (310) 428-1342, or e-mailed at Visit his Web site at www.re101.net.)
Originally published in the Santa Monica Daily Press print edition on September 6, 2006. Read the original PDF.