4 Common ways to Hold Title to Real Property

How many times have you thought about how you hold title to your home? If you currently do not own a home then how will you hold title when that day comes. Previously Brian Qualls wrote an article on California Home Strategies describing how a married couple should hold title in the state of California. However we have not addressed how single persons, business partners or friends buying together would hold title. In the next few paragraphs we are going to take a look at 4 Common Ways to Hold Title to Real Property in 6 different aspects.

Tenancy in Common:

• title – each co-owner has a separate legal title to his or her undivided interest.
• Parties – any number of persons
• Division – Ownership can be divided into any number of interests, equal or unequal.
• Conveyance – Each co-owner’s interest may be conveyed separately
• Death – On co-owner’s death, his or her interest passes by will to that person’s devisees or heirs, No survivorship right.
• Successor’s Status – Devisees or Heirs become tenants in common

Joint Tenancy:

• title – There must be unity of title and time created in one document
• Parties – any number of persons
• Division – Owner interests must be equal
• Conveyance – Conveyance by one co-owner without the others will sever (terminate) that individuals joint tenancy
• Death – On co-owner’s death, his or her interest ends and cannot be disposed of by will. Survivor(s) own(s) the property. An affidavit of death of joint tenant establishes death
• Successor’s Status – Last survivor owns property 100%

Community Property:

• title – is in the community. Each interest is separate but management is unified
• Parties – Only Husband and wife. Registered domestic partners have community property rights
• Division – Ownership and managerial interests are equal
• Conveyance – Real Property requires written consent of other spouse or registered domestic partner, and separate interest cannot be conveyed except upon death
• Death – Upon death of one spouse or registered domestic partner, 50% belongs to the surviving spouse or RDP, 50% goes by will to descendant’s devisees or by succession to surviving spouse or RDP,
• Successor’s Status – If passing by will, tenancy in common between devisee and survivor results

Community Property with Right of Survivorship:

• title – is in the community. Each interest is separate but management is unified. Title must expressly state community property with Right of Survivorship
• Parties – Only Husband and wife. Registered domestic partners have community property rights
• Division – Ownership and managerial interests are equal
• Conveyance – Real Property requires written consent of other spouse or registered domestic partner, and separate interest cannot be conveyed except upon death
• Death – Upon death of one spouse or registered domestic partner, his or her interest ends and cannot by disposed by will. Survivor owns the property 100%. An Affidavit of death establishes death of a spouse or RDP.
• Successor’s Status – Purchaser can only acquire whole title of community, cannot acquire part of it.

As always I suggest that you talk to a Real Estate attorney or do your own research when choosing the most appropriate way for you too hold title.

Buyer’s Market? Think Twice and Consider the Facts!

The last few years of the market have caused many buyers to get in the mind frame that it is a buyer’s market. That the market needs them and that they are in control. I have had many buyers that do not want to acknowledge the shifts in the market. Traditionally, we would say it is a buyer’s market if there is greater than a 6 month supply in inventory. This is definitely specific to the area that you live in but here in the Sacramento area we are short of six months inventory. What does this mean? It means that we are in a seller’s market people.

Few Things to Consider:

1. Sale to List Price Ratio – This represents the average list price of a home compared to the final sale price. In a buyer’s market we would generally see the sale price well below or below the list price. This would signify saturation of inventory and sellers that have to adjust the expectation based on interest and demand. Currently in certain price points in Sacramento, especially those under 300K we are seeing the final sale price above list price. Why? Banks are listing the properties at prices that are extremely attractive and many buyers are battling for the home. Some homes have as many as 20 offers on the property. This creates an emotional bidding war and the home goes to the highest bidder (with the best financing or apparent financing). The price is then pushed up and the Sale to list price is effected.
2. Days on the Market – Just like Sale to List Price the average time on the market is a good indicator of who is controlling the market. The majority of the sales are selling with less than 90 days on the market. In a buyer’s market the sale time is extended and we see up to 180+ days on the market. The homes that are coming on the market are selling and there would be no reason they would not. Interest Rates are low and with the Tax Credit one would be foolish not to consider buying.
3. Months of Inventory – Late 2007 and early in 2008 we had as much as 11 months of inventory on the market. This is not the case right now. With less than six months of inventory on the market the seller’s are in control. With their ridiculous per diem charges for extended escrows to their choices of southern California Title and Escrow companies. The seller is setting the terms and the standard and with multiple bids they can sort through and pick the cream of the crop. That being said there are a ton of homes that are owned by the banks that they are not releasing to the market. There is enough inventory in the wings, in my humble opinion, to turn the market right back to months of inventory. The banks are holding it back so that they do not drive prices down by over saturation.

Questions I hear from Buyers:

1. The property is listed for 140K. Do you think that I can offer 135K and ask for 5% seller credit? – No! That property will at least go for 140K and many times more. The things that you must take into consideration are the days on the market, whether or not it is seller owned, bank owned or a short sale. This will make a difference and this will change the strategy. Short Sales tend to have less interest because of the time they take but they also have little flexibility in price and credit. Traditional sellers have a number they want and it comes down to a meeting of the minds and the banks are the game that I described above.
2. Can I write offers on several properties and take the one that gets accepted? – This is where I defer to the Real Estate agent. Agents are effective because they build a reputation with other agents. The better the reputation the better the odds that your offer would be accepted. If you are writing offers on properties that you really do not want you are wasting a lot of people’s time.
3. I am approved for 150K and I really like this property. It is listed at 155K do you think I can qualify? In today’s market climate I suggest that if you are qualified for 150K that you start your search in the 130K – 140K range so that you have room to be consider if you are asked for Highest and best. If you are pushing your approval amount you are putting yourself at risk. With the Volatility of the rates I would ask your Loan Officer to make sure that they have padded the rate on the approval to cover any swings. If your approval is a best case rate and your offer is accepted and rates have gone up you may not qualify or feel comfortable with the new cost.

In conclusion, if you are in the market to buy you must understand the climate that you are in and have reasonable expectations. My most recent closing searched for one year for the right home and my most recent contract wrote 40 offers before one was accepted. That does not sound like a buyer’s market to me. The good news is that you are going to buy at a Low Price with a Low Rate or so we hope!

* Much of the information provided is specific to certain price points and in certain geographic locations. Always consult your Real Estate Professional to determine your market conditions as they may vary.  Traditional Sellers may have a different experience and short sales have their own behaviors which we will examine in posts to come with a very Special guest. A local Short Sale Specialist. If the banks begin to dump the inventory that they are holding back we could see another swing. Stay Tuned.

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Eliminating Capital Gain on Real Estate Owned by Married Couples: A Simple, Yet Critical Strategy By Brian Qualls, Esq.

 

California Home Strategies is happy to bring you the first in our series of featured business partners. Brian Qualls, Esq. is an attorney who specializes in Estate Planning. What he has brought to California home strategies is invaluable information. Enjoy the first in the series of many great guests to come.

How do you hold title to your home? Odds are, if you are married and purchased real estate with your spouse, you elected to hold the property as Joint Tenants. This has been the common practice recommended by many real estate agents, lenders, and attorneys for quite some time. The advantage to holding property in Joint Tenancy is that when the first spouse passes away, the deceased spouse’s one-half interest in the property automatically passes to the surviving spouse with little to no transfer cost. Provided that such a transfer of ownership was the couples’ objective upon the first spouse’s death, holding property as Joint Tenants seems like a no brainer.

Here’s the downside: If you hold real estate in Joint Tenancy with your spouse, you are missing out on significant tax benefits that are available under another method of holding title (which has all of the benefits of Joint Tenancy discussed above) that we’ll discuss in just a moment. First however, we need to understand the basics of calculating capital gain for tax purposes under the traditional Joint Tenancy method. Here’s how it works … when the first spouse passes away, the surviving spouse receives a “step up” in cost basis equal to 50% of the market value of the property at the time of the first spouse’s death (cost basis is, essentially, what you paid to purchase the property). The remaining 50% of the property retains the surviving spouse’s original basis. This concept is best illustrated through an example:

Max and Marge bought a house and took title as Joint Tenants. They paid $200,000 for the home (their cost basis for the purposes of calculating capital gain is therefore $200,000). Thirty years later, Max passes away. At the time of Max’s death, the property has increased in value to $1,150,000 (this assumes an annual appreciation of 6% over a 30 year period). Since Marge gets a “step up” in cost basis to 50% of that amount ($575,000), her new cost basis is $775,000 (her initial basis of $200,000 + Max’s stepped up basis of $575,000). Assuming that Marge chooses to downsize and sell the family home immediately, she will have capital gain in the amount of $375,000 ($1,150,000 sales price – her new $775,000 cost basis). At best (assuming Marge had lived in the home for 2 out of the last 5 years), she will have $250,000 of that $375,000 exempt from capital gains tax. But she’s still left subject to capital gains tax on $125,000 when she sells. This will result in a pretty hefty tax bill.

Fortunately, there is a better option. Since July 1, 2001, married couples have been able to take title to real estate as Community Property with Right of Survivorship. The “Community Property” designation will entitle the surviving spouse to a “double step up” in cost basis equal to 100% of the market value of the property at the time of the first spouse’s death. Therefore, in the example above, Marge’s new cost basis will be the full market value of $1,150,000, and she will be able to sell the property for zero capital gain. Moreover, if she chooses to remain in the residence (or even rent it out for a few years), she will still be able to rack up an additional $250,000 in appreciation and sell it tax free down the line.

It is important to note the significance adding the of the “with Right of Survivorship” language to the Community Property designation. That is what enables the surviving spouse to automatically inherit the deceased spouse’s one-half interest in the property with little to no transfer cost (the same benefit of Joint Tenancy that is often so appealing to married couples). If the property were only taken as Community Property without the “with Right of Survivorship” language, a court process would be required to transfer the deceased spouse’s one-half interest over to the surviving spouse. Therefore, if the couples’ objective is for the survivor to receive full ownership and control over property, opting for the “with Right of Survivorship” designation makes perfect sense.

If you are buying a new home or refinancing and would like to take advantage of taking title as Community Property with Right of Survivorship, it is as simple as checking the appropriate box in your closing documents. If you already own a home in Joint Tenancy and would like to change how you hold title, no problem. You can simply sign a new deed transferring your property from yourselves as Joint Tenants, to yourselves as Community Property with Right of Survivorship. Ask your title company or a competent attorney to assist you.

 

About the Author:

 

Brian Qualls is an estate planning and trust attorney who assists families throughout California in protecting their loved ones (and their hard earned assets) through well designed estate plans that work. He firmly believes that everyone should at least have a basic plan in place, and therefore guarantees that every client who consults with his firm will walk away equipped with a simple will, power of attorney for finances, and advance health care directive for a nominal consultation fee. The fee itself is refundable at the end of the consultation in the event the client is not fully satisfied with the experience. If more comprehensive planning is requested by the client, the consultation fee is applied accordingly. Brian can be reached by email at

Brian@BrianQualls.net, and his educational blog is available for the public at www.PlanYourEstate.net.