Be Thoughtful When Deciding How To Take Your Home's Title
Published on Alaska Dispatch News (http://www.adn.com)
Barbara Ramsey, Clair Ramsey
November 11th, 2014
You’ve found a home, the home inspection is done, and you’ve submitted duplicates of the lender- required documentation. Now your loan is approved and everything ready to go to the title company to sign the closing documents. One of the questions during the loan process that you will be asked is, “How do you want to take title?” This question deserves more thought than just a quick response.
In Alaska, there are several ways to take title.
The first is as Tenants in Common. This is the only option for unmarried individuals in Alaska, but it could be used by married couples, too. Upon the death of one owner, the property does not automatically transfer to the other owner but passes as defined in a will through probate or other legal documents (like a revocable trust).
The second common way to hold title is as Tenants by the Entirety. This is the typical method married couples take title to real property. In the event one spouse dies, this title allows the property to automatically pass to the spouse, thus avoiding the probate process. However, for tax purposes, only half of the income tax basis is adjusted to fair market value upon the death of the spouse. This could leave the other half exposed to higher income taxes if the surviving spouse must sell the property in the future to generate funds. Be aware that the IRS rules, and the amount of potential tax liability, are different for a primary residence and investment real property.
A third, less known and used title option stems from Alaska’s 1998 Community Property Act. While similar to Tenants by the Entirety, this title is elective and requires either a community property agreement or community property trust be set up. One benefit of holding title as community property is 100 percent of the asset’s basis is adjusted, not just the 50 percent ownership upon the death of the first spouse. This protects the entire amount from income tax if the remaining spouse must sell the property soon afterwards. This title also provides a definite income tax advantage over Tenants by the Entirety by sheltering more value from income tax, especially when the assets have a low basis and have experienced high appreciation.
A word of caution -- nine other states have community property systems in place. Alaska is the only one where it is optional, but you must have the proper documentation in place to elect Alaska Community Property.
The fourth is for an individual to take title alone, typically reserved for non-married owners. This can get a little complicated when a marriage occurs later. If the marriage eventually ends in a divorce, the divorcing spouse will be able to claim a “fair and equitable share” of all assets (including the real property) by state statute. On death of the owner in title, state statutes provide the surviving spouse with a homestead allowance and elective one-third share of the estate. In either case, when the property is sold, the title company may require additional documentation in order to insure clear title to the next owner.
With so many different ways to take title, it is important to make certain the way you take title works with your overall estate planning goals. As your life changes, you may need to re-evaluate your title choices as well.
Barbara and Clair Ramsey are local associate brokers specializing in residential real estate. Their column appears every month in the Alaska Dispatch News. Their email address email@example.com