Purchasing a home or other large asset can be the thrill of a lifetime. Sometimes in the flurry of activity, there are decisions made that could come back to haunt you. No, this isn’t buyer’s remorse. Well, not the kind you are thinking of. The remorse comes way down the road when you find that things aren’t quite the way you thought they were. One thing to make sure you get right is the type of ownership you choose when purchasing such an asset. Here are five types of property ownership, and how each works. Familiarize yourself with these. It may just keep a few extra dollars in your pocket.
This is the easiest form of ownership, as it is exactly as it sounds. One person has complete ownership of the asset in question. The owner in this case can sell, give or donate the asset to anybody without worries of claims from others. The property is transferred based on that person’s wishes in a will. If there is no will it passes to that person’s heirs based on state law.
The beneficiary who receives the property also receives a “step-up” in the basis of the house for tax purposes. For example, if your parents bought a house thirty years ago for $100,000 that is now worth $1 million. They would have a gain of $900,000 if they sold it. If they passed away and you inherited the house, the “basis” on which you could be taxed would “step-up” to $1 million. If you sold the property for that amount, there would be no capital gains.
One of several “joint” ownership options, it is structured with the same foundation. Two or more people own equal, undivided shares of a property. This ownership can be held by any individuals, regardless of relationship. The ownership stake is not transferable either while alive, or upon death. It cannot be passed down to that person’s heirs, regardless of whether there is a will or not. The ownership stake is automatically passed to the surviving owner(s).
Joint Tenancy With Rights of Survivorship (JTWROS)
This ownership structure is almost identical to the previous one. The major difference is that you can transfer your ownership stake to another person while alive.
There is a tax situation that you must be aware of here. If an owner passes, the surviving owners receive a step-up in the basis of the property, but ONLY portion of the property owned by the deceased owner. If the surviving owner(s) were to try and sell the property, they would still have to show the full gain on their share of the property.
Joint Tenancy In Common
Like the previous options, Joint Tenancy in Common gives each owner an undivided interest in the property to all owners. However, unlike the ones above, the owners can hold different sized stakes in the property. An owner may sell, give or donate their share of a property without the permission of the other owners. Their ownership is not transferred to the remaining owners, nor is it passed on to a spouse. It is passed down to their heirs based on state law. Regardless of whether there is a will, the property must go through probate. This type of ownership is commonly used when spouses are in second marriages ( or third?) and have families from the previous one.
Community property is a bit of a different beast than the other types of ownership. It is only available in 10 states currently: Alaska, Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin.
This ownership structure is specifically for married couples. Any asset or investment that is acquired during the marriage becomes a part of the “community” of the marriage. Upon the death of a spouse, the asset does not automatically transfer to the surviving partner. It can be passed on however the original owner sees fit.
Let’s break this down. A couple gets married in California and buys a house on the beach. If the couple gets divorced and the wife passes away, she can will her shares to her kids, new husband, hairdresser or dog and the man cannot stop it. If she wanted to pass her shares on while still living, she would need his consent to do so.
If you move from a community property state, that does not waive these requirements of the assets that were purchased while living in it. Anything purchased while separated also falls into the community property arrangement. The same step-up rules apply for the beneficiary in community property states.
When you go to buy a home or set up an investment account, make sure you review which of these you are using. Not every type applies to every situation, but when there are options, is when you need to confirm you are making the right choice for yourself.
If you’re not sure which choice is right for you, consider consulting a financial advisor. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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