Have (or Buying) Property? Know How to Hold Title
Written by Teresa D. Lancaster
When you are sitting at the desk of a title company purchasing a new home, it is an exciting time but one that also comes with a lot of stress. When you finally get to the point of signing above the line, many people don’t realize how important some details are. How you hold title determines how you control it, how you can transfer it to others, and how it is transferred (and to whom) at your death.
If you are a single person buying property alone, then it’s simple. You are the sole owner, and it’s your sole and separate property.
If you are purchasing the property with someone else, whether a spouse, a relative, a partner, or a friend, the options are more complex. Here are the typical options:
Sole and Separate: A married individual can purchase property as sole and separate, but because Arizona is a community property state, special steps need to be taken. Any property acquired during a marriage is considered community property, unless proved otherwise. If you and your spouse intend for property to remain separate, the deed should put the designation “as (his/her) sole and separate property, regardless of marital status.” In addition, the spouse not purchasing the property should execute a “disclaimer” deed to make it clear that he or she does not have an interest in the property.
Community Property with Right of Survivorship: This is usually the preferred way to hold title if you are married. With this type of ownership, both spouses hold and equal, undivided interest in the property. This option is reserved only for married couples. Upon the passing of one spouse, the other inherits the property automatically. (The key words for the property to pass automatically at death are “right of survivorship.”) Bonus: at the death of the first spouse, the entire property gets a step up in basis to the date of death value for capital gains tax purposes.
Community Property: This also requires a valid marriage. Because there’s no “right of survivorship,” property held as Community Property does not automatically pass to the surviving spouse at the first spouse’s death. At one spouse’s death, his or her share will pass according to his or her Will or state intestacy law if there is no Will. A court procedure is required to legally pass the deceased spouse’s share to the recipient(s) in accordance with the Will or state law, either a full probate proceeding (if the deceased spouse’s half exceeds $100,000 in assessed tax value) or court collection by affidavit (if less than $100,000). Both halves of the property still get the step up in basis.
Joint Tenants with Right of Survivorship: Marriage is not required, and there can be as many joint tenants as you want, but each ownership interest must be equal; for instance, if there are four, each must own 25%. This is a popular way for family members such as siblings or children and parents to hold title. The right of survivorship means upon the death of one owner, the property interest of the deceased owner passes directly the remaining owner(s). There is no probate required, and the deceased person’s interest is not subject to his or her Will or intestacy. Only the portion that the decedent owned receives a step up in basis.
Tenants in Common: Joint Tenants must hold equal interests, and Tenants in Common may hold unequal interests, and there can be any number of owners. At one tenant’s death, his or her share passes according to his or her Will or state law if there is no Will. The co-owners do not automatically inherit because there’s no “right of survivorship.” Some kind of procedure is required to pass the deceased tenant’s share to the recipient(s), either a full probate proceeding (if the decease tenant’s interest exceeds $100,000 in assessed tax value) or court collection by affidavit (if less than $100,000).
As you might have gathered, those words “right of survivorship” make a huge difference. Those three words, and the terms (or lack of terms) in an estate plan, determine who owns the property and what must be done to legally pass it on.