COMMON WAYS TO HOLD TITLE TO REAL PROPERTY


Title to real property in California may be held by an individual in SOLE OWNERSHIP or by individuals in CO-OWNERSHIP in any of a number of different ways. The following is a brief summary of some of the common ways that real property may be held. For more information, please consult your attorney or accountant. There may be legal and tax consequences to the vesting that you select.

SOLE OWNERSHIP

Sole ownership is ownership by one individual, corporation or another entity capable of acquiring title. The discussion in this paragraph will be limited to the ways in which one individual may hold title.

1. A SINGLE MAN/WOMAN: A man or woman who has not been legally married. e.g. Bruce Buyer, a single man.

2. AN UNMARRIED MAN/WOMAN: A man or woman, who was previously married and is now legally divorced. e.g. Sally Seller, an unmarried woman.

3. A MARRIED MAN/WOMAN, AS HIS/HER SOLE AND SEPARATE PROPERTY: A married man or woman who wishes to acquire title in his or her name alone. The spouse must consent, by quitclaim deed or otherwise, thereby relinquishing all right, title and interest in the property. e.g. Bruce Buyer, a married man, as his sole and separate property.

CO-OWNERSHIP

Co-ownership, or ownership by two or more persons can be acquired in any one of the following forms:

1. JOINT TENANCY: Is ownership by two or more persons in equal interest subject to the right of survivorship in the surviving co-owner. Title must have been acquired at the same time by the same conveyance. When a joint tenant dies, title to the property is automatically conveyed by operation of law to the surviving joint tenant(s). Therefore, joint tenancy property is not subject to disposition by will. i.e. Bruce Buyer and Barbara Buyer, husband and wife as joint tenants.

Many married persons have acquired and continue to hold property as Joint Tenants with their spouses in an effort to avoid probate. While Joint Tenancy does not avoid probate, it does not assure the spouses that that the survivor will receive a double stepped-up basis for capital gains purposes. Instead, when a person who holds title with his or her spouse in a form other than Community Property dies, the survivor is assured only of a step-up in the value of one-half of the property. It is often possible, after the death of one spouse, to obtain a court order determining that the property was actually Community
Property even though title was held as Joint Tenants, in an effort to obtain a step-up in basis of the entire property (i.e., double stepped-up basis). However, this result is not assured and the Internal Revenue Service has sometimes successfully challenged these after-death attempts at estate planning.

2. TENANCY IN COMMON: Is ownership by any two or more individuals in undivided fractional interests which may be unequal in quantity or duration and may arise at different times. Each tenant in common owns a share of the property and is entitled to a comparable portion of the income and must bear the equivalent share of expenses. Each co-tenant may sell, lease or will to his/her heir that share of the property belonging to him/her. i.e. Bruce Buyer, a single man, as an undivided 3/4ths interest and Penny Purchaser, a single woman, as to an undivided 1/4 interest, as tenants in common.

3. COMMUNITY PROPERTY: Is ownership by husband and wife acquired during their marriage which they intend to own together, as differentiated from separate property which is property acquired before marriage by separate gift or bequest or which is agreed to be owned only by one spouse. In California real property conveyed to a married man or woman is presumed to be community property, unless otherwise stated. Since all such property is owned equally, husband and wife must sign all agreements and documents of transfer. Under community property, either spouse has the right to dispose of one half of the community property. If a spouse exercises his/her right to dispose of a one half interest in the community property by will, that half is subject to administration in the estate. e.g. Bruce Buyer and Barbara Buyer, husband and wife as community property.

California has enacted a brand new form of property ownership - "Community Property with Right of Survivorship." This new form of ownership will become available July 1, 2001. Community Property with Right of Survivorship combines the tax benefits of Community Property and the survivorship aspects of Joint Tenancy.

Until now, the only forms of ownership by two or more persons recognized in California have been Joint Tenancy, Tenancy in Common, Partnership, and Community Property [without right of survivorship]. Both the traditional Community Property and the new Community Property with Right of Survivorship can be used only between husband and wife. (California law does not recognize common law marriage, unless the common law marriage occured in a state other than California that recognized the establishment of common law marriage.)

Other States.
With this new law, California joins the majority of the states that recognize Community Property by providing for this optional form of ownership. The overwhelming majority of states do not recognize Community Property in any form. Keep in mind that the specifics of all forms of ownership - and their implications - differ substantially from state to state. The issues discussed in this memo are relevant only for California residents.

Stepped-up Basis. The new form of ownership carries the benefit of assuring spouses who hold title in this form that the survivor spouse will have the benefit of a "double stepped-up basis" for capital gains (income tax) purposes when the surviving spouse eventually sells the property. This means that the entire increase in value from the date the property is acquired by the spouses to the date the first spouse dies escapes capital gains taxation. Double stepped-up basis is available only in the eight community property states, for property held as Community Property (including Community Property assets that are held in a trust).

Effect of Will. Another effect of holding title as Community Property with Right of Survivorship is that the ownership will not generally be affected by the first spouse's will, even if the will leaves the deceased spouse's interest in the property to someone other than the surviving spouse. This is the same as with Joint Tenancy - i.e., the deceased spouse's will does not interfere with survivorship even if the will would otherwise leave the deceased spouse's interest to someone else. (With traditional Community Property, the deceased spouse's will generally is effective to leave the decedent's one-half interest in the property to someone else, but does not effect the one-half interest owned by the surviving spouse.)

Terminating Survivorship. Even if the property is held as Community Property with Right of Survivorship, it is possible for either spouse, during the spouse's joint lifetime, to terminate the survivorship character of the ownership by executing and delivering an appropriate instrument. The same is true for property held in Joint Tenancy, whether by spouses or non-spouses.

Owners should not decide lightly how to hold title. Each choice in taking title or in making changes in property you already own has both positive and negative impications. The right choice depends on a number of issues including marital status, whether a change in marital status (marriage or divorce) is contemplated, and other factors. You should consult an appropriate professional to make the right choices for you.

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