Home ownership! You have found your dream home, and before you close the Title Company calls to ask you how you would like to take title. What? How can you know! If this is your first home, or your first in Arizona, this question may be puzzling. What are your choices? What can happen if you die? What about your heirs? What about estate taxes? What if you own a home with someone you are not married to? What if you and your neighbors want to “go in” to buy the vacant lot behind your houses to preserve your view and privacy? Taking title may have significant legal, estate planning, and tax consequences. You should seek legal and tax advice from qualified professionals.
First thing to know about Arizona is that it is a community property state. Property acquired by a husband and wife is presumed to be community property unless specified otherwise. To take title as Community Property or Community Property with Right of Survivorship requires two married people. Each gives the couple an undivided one-half interest in the property and signatures of both are required to convey or encumber the property (sell or take out a loan against it). In addition, the fair market value of the property “steps up” to the value of the home upon the passing of the spouse, instead of the value when the property was purchased. The Right of Survivorship automatically passes the estate to the surviving spouse upon death of either spouse without going through probate.
Another way for a husband and wife to take title is to take it as Joint Tenants with Right of Survivorship. The parties do not need to be married, and there can be more than two. Once again, to convey or encumber the property, all of the joint tenants signatures are required and upon death of one of the joint tenants the estate passes to the surviving tenant outside of probate. The big difference is that one of the tenants can sell their interest or share in the property. This may be handy if “Friends for Life” doesn’t last that long.
So what are options for domestic partners? The option of Joint Tenants with Right of Survivorship does not require marriage, and the option to sell your interest may be an attractive option. But what if you die, and you would like your heirs to get your share of the property? Holding the title as Tenants in Common gives you the option to transfer your interest in the property to a third-party and leave your interest to your heirs through a will. It can also create a uncomfortable situation with your partner owning a house with someone they do not know, or do not get along with! One of the ways to manage this is to set up a Trust. A Trust can provide that the property passes to the other owner without probate. It can set up a contingent beneficiary with the deceased owners family. It can also provide for the other member of the relationship to continue to live in a house that was previously owned by the deceased.
Tenants is Common is also a way for neighbors to purchase a lot that they wish to preserve for view, privacy, or whatever reason. Let’s say that three homeowners want to secure a lot behind their property to make sure that they always get to view the Four Peak mountain views. To actually divide the lot up into 3 parts is not practical, and the HOA will not allow a lot to be divided. By taking the lot as Tenants in Common, the three homeowners own a one-third interest in the lot. Each tenant’s share can now be conveyed with the sale of their house, and can be passed to their heirs by will along with the house. Each share has it’s own tax basis, and all share owners signatures are required to sell the whole lot.
As you can see, the way you take title may impact your life and the life of others down the road, or when the unexpected happens. Speak to your tax or legal adviser and follow their advice for you and your situation.