Title to Your First Home— More than Just Proof that You Own It!

When buying your first house, you're probably dreaming of the day when they hand over the keys and the title—that little piece of paper that says you are now the very proud owner of your home. But there's more to it than just a statement verifying that you own the property. The title also explains how you own it. To better understand that, let's start with a brief overview of some common forms of title.

Sole Owner

Even in the case of a “sole owner,” where one individual claims all ownership of a property, there are still variations in title. For individuals who have never married, they can file as “Single Man/Woman.” If an owner was previously married but is no longer, they can claim title as “Unmarried Man/Woman.”

It is possible to become a sole owner when you are married or in a domestic partnership; however, the non-owning spouse or partner should disclaim any ownership. (A mere promise will not suffice; the disavowal of ownership should be recorded in a “quitclaim deed.”)

Tenants-In-Common

Sometimes, it's hard to understand title issues because it's hard to get past thinking about that single building on a single piece of land. For now, though, set that mental image aside. Instead, imagine you and a business partner both start a company. While you could both go in 50/50, there's no requirement to do so. One of you can put in 90%, while the other chips in 10%. At any time, you can buy or sell your ownership shares to your partner or a completely new person. And if you were to die, your shares go to your heirs. Your partner doesn't have any automatic right to inherit or acquire your shares.

That's basically how a “tenancy-in-common” works for a house. You and your co-owner both own agreed-upon percentages of the home, and both of you can sell or give your shares to each other or someone else at any time.

If either of you should die, the co-owner will not automatically inherit the other's interest in the property; instead, it will go to their heirs after probate or trust administration. Probate is an expensive and time-consuming process that could tie up the property for a considerable amount of time. In California, it also may have enormous implications for the heir's property tax liability if the property is highly appreciated in value from when it was originally purchased (see my post about Proposition 19). Thus, in some cases, increased property taxes owed on “half the house” could be so much that the survivors are forced to sell the home.

Joint Tenants with Right of Survivorship

To have a joint tenancy with right of survivorship, all owners own an equal amount of the property, and they must have acquired ownership in the property at the same time. Furthermore, they each are entitled to use the entire property for as long as they both own it. One owner cannot sell to anyone else (without destroying the joint tenancy and automatic transfer of their share), nor can they restrict the other's use of the property (e.g., they can't sell a portion of the land or limit access to a part of the house). If an owner dies, the decedent's ownership interest automatically transfers to the survivor without probate = “last man/woman standing wins.” Thus, the decedent's share does not pass to the heirs of their estate, but rather the other joint tenants.

Community Property

California law provides that any property (real estate, stocks, investments, etc.) acquired during a marriage is my default considered to be “community property,” i.e., shared between the couple. California also allows registered domestic partners to own assets as community property. When a piece of real estate is held as community property, upon one spouse's death, the property can (through a will or trust), go to the surviving spouse, or to an heir other than the surviving spouse if desired. California law also provides for couples to choose “Community Property with a Right of Survivorship.” In that case, if one spouse dies, the property does automatically go to the surviving spouse, even if a will names another beneficiary.

Another huge benefit to owning real estate as community property is that it can limit capital gains taxes should the survivor choose to sell the property. Basically, the survivor gets a do-over on the income tax “basis” of the property that is “stepped-up” to the actual market value of the home on the date the spouse died. Thus, if the survivor sells the property, they only pay capital gains tax on the difference between the date of death value and the sales price, not on the difference between what they originally purchased the property for years ago and the sales price. This difference in basis can be huge in California with highly appreciated property.

Revocable Living Trust

In this case, the trust owns the property instead of an individual or couple. The creator(s) of the trust (or other specified beneficiaries) use the property as long as they live, and upon death, the trust specifies to whom, how, and when the property passes. Another huge benefit of owning a property in a revocable living trust is that the beneficiaries avoid going through probate.

As you can see, the proper titling of real estate is complicated and very case and goal specific. The information provided here is not intended to be legal advice but rather to inform you of the various options that are available. If you are buying your first home or acquiring other real property and need legal advice on how to best structure your estate, call Davidson Estate Law, a family-owned and operated estate planning law practice in the San Francisco Bay Area.