Real Estate Investing: Holding Title
The way in which you decide to hold title to your real estate investment property should be the result of careful consideration. There are many available options. The following excerpt from “Loopholes of the Rich” by Diane Kennedy, CPA, examines the most common ways of holding title.
One of the questions you’ll have to deal with when you buy your real estate investment property is how you want to hold title.
Joint Tenancies
If you and another person own a property, you are probably joint tenants. That means that you have an undivided interest in the property. So does your joint tenant.
The undivided interest means that each joint tenant owns the entire property and has equal rights to use all of the property. A joint tenant cannot sell their interest in the tenancy without destroying the joint tenancy.
Property held as a joint tenancy cannot be seized easily. That’s because there is ownership held by another tenant.
Joint Tenancy with Rights of Survivorship
Another benefit of joint tenancy is the right of survivorship. Survivorship provides joint tenants rights that differ from those enjoyed by tenants-in common. A tenant-in-common has a separate ownership in the property, so they can leave their interest to an heir upon their death. Joint tenants have a complete ownership, so they don’t have an interest that they can bequeath an heir. Upon the death of a joint tenant, the surviving tenant automatically owns the entire property. This automatic transfer feature is called a “right of survivorship.”
The right of survivorship is the reason why married couples often use joint tenancies.
Community Property
In community property states, there is an additional way that married couples can hold title to their property—as community property assets. This is often a more favorable way for married couples to own property because it allows the spouse to not only inherit the property without estate tax, but also be able to take a step-up in basis. That means that the surviving spouse inherits at current fair market value for the property and thus would have no tax due upon an immediate sale.
Tenants-in-Common
A joint tenant’s interest in the property is undivided, whereas a tenant in-common’s interest is divided.
If you want to use an LLC to hold your interest, you would have to first set up the tenants-in-common and then would have one of the tenants be your LLC. Your partners could then own their individual tenancy in either their own name (no asset protection) or their own individual LLC.
Land Trust
Land trusts seem to be the darling of the seminar circuit these days. They are great devices for privacy and for transferring ownership, but they do not offer asset protection. The privacy comes about because title is recorded in the name of the trustee of the land trust, not in the names of the beneficiaries—or true owners—of the trust.
If you are the beneficiary of a land trust, no one will be able to find you through a search of public records. The fact that the search does not turn up any ready assets to proceed against may well deter litigation.
The way in which you decide to hold title to your real estate investment property should be the result of careful consideration. There are many available options. The following excerpt from “Loopholes of the Rich” by Diane Kennedy, CPA, examines the most common ways of holding title.
One of the questions you’ll have to deal with when you buy your real estate investment property is how you want to hold title.
Joint Tenancies
If you and another person own a property, you are probably joint tenants. That means that you have an undivided interest in the property. So does your joint tenant.
The undivided interest means that each joint tenant owns the entire property and has equal rights to use all of the property. A joint tenant cannot sell their interest in the tenancy without destroying the joint tenancy.
Property held as a joint tenancy cannot be seized easily. That’s because there is ownership held by another tenant.
Joint Tenancy with Rights of Survivorship
Another benefit of joint tenancy is the right of survivorship. Survivorship provides joint tenants rights that differ from those enjoyed by tenants-in common. A tenant-in-common has a separate ownership in the property, so they can leave their interest to an heir upon their death. Joint tenants have a complete ownership, so they don’t have an interest that they can bequeath an heir. Upon the death of a joint tenant, the surviving tenant automatically owns the entire property. This automatic transfer feature is called a “right of survivorship.”
The right of survivorship is the reason why married couples often use joint tenancies.
Community Property
In community property states, there is an additional way that married couples can hold title to their property—as community property assets. This is often a more favorable way for married couples to own property because it allows the spouse to not only inherit the property without estate tax, but also be able to take a step-up in basis. That means that the surviving spouse inherits at current fair market value for the property and thus would have no tax due upon an immediate sale.
Tenants-in-Common
A joint tenant’s interest in the property is undivided, whereas a tenant in-common’s interest is divided.
If you want to use an LLC to hold your interest, you would have to first set up the tenants-in-common and then would have one of the tenants be your LLC. Your partners could then own their individual tenancy in either their own name (no asset protection) or their own individual LLC.
Land Trust
Land trusts seem to be the darling of the seminar circuit these days. They are great devices for privacy and for transferring ownership, but they do not offer asset protection. The privacy comes about because title is recorded in the name of the trustee of the land trust, not in the names of the beneficiaries—or true owners—of the trust.
If you are the beneficiary of a land trust, no one will be able to find you through a search of public records. The fact that the search does not turn up any ready assets to proceed against may well deter litigation.