American LAW

An article on American tax law by one of our American lawyers.


Leigh Alexandra Basha, Attorney

So, you are going to purchase your home in the United States and have a piece of the American dream. What form of ownership is best for you and what should you discuss with your attorney preparing the deed? Should you buy it in your own name? Should you buy it with another and if so how should you hold title? Should you have a co-ownership agreement? Should you buy it through an entity?

First, if you are a single individual, one simple and straight forward way to title your home is in your own name. Depending on what state the property is located, the disposition of the property at your death you will be governed under the laws of that state. For example, if you own it in your own name in fee simple and you die, in Virginia the real estate drops like a rock and will fall into the hands of your beneficiaries, as you designate under your will or absent a will under Virginia’s intestacy laws. In Maryland, you have a slightly different result as in DC.

From an estate tax prospective, the value of the property will be includable in your estate at your death. So, depending on whether you are a US citizen, a resident alien, or a non-resident alien different tax ramifications would apply.

To keep this asset out of your estate, you may wish to own it through an entity such as a corporation or a Limited Liability Company ("LLC"). Holding real estate in a C-Corporation generally is not advisable because of the double taxation at a later date. Although one member LLC now exist in most states and you may be eligible to "check the box" to have it treated as a pass through entity, your interest in the LLC will still be includable in your estate. Bottom line, ownership is probably best held in your own individual name or in your own revocable living trust if you wish to avoid probate.

Secondly, if you are buying the property with another you have two (2) choices: first you may hold it as joint tenancy with rights to survivorship ("JTROS"); or second, as tenants in common. If you own it joint with rights of survivorship you are deemed to own an undivided interest in the whole property. You will probably want to have a co-ownership agreement to address who will be responsible for capital improvements, maintenance, and other expenses. At death the property will vest in the surviving joint tenant. Although you have avoided probate from an estate tax prospective, 100% of the value of the property between non-spouse joint tenants will be deemed to be in the estate of the first co-owner’s to die, except to the extent one can show contribution by the surviving co-tenant. Therefore, you must keep track of all contributions.

If you are married you have an additional choice which is tenancy by the entirety with rights of survivorship ("TBE"). Under current law, if you purchase a property with a spouse and hold it as TBE, you will not have any adverse gift tax consequences even though one spouse put up all the equity. An advantage of tenancy by the entirety is it provides protection against individual creditors, although, not joint creditors. For example, if one spouse has a judgment against him or her the judgment creditor cannot put a lien against the property held TBE. This protection does not apply to any other ownership, however, from an estate tax prospective, if title is held TBE and the surviving spouse is a non-U.S. citizen the decedent spouse will not get a 100% marital deduction for the asset passing to the surviving spouse unless it is placed in a QDOT trust. Therefore, from an estate tax prospective it may be better to not have it pass with rights of survivorship and instead have it pass into a QDOT Trust.

Both married couples and non-married couples can hold property as tenants in common in whatever percentages would be suitable. For example, husband and wife could hold property as tenants in common between each of their revocable living trusts or 50/50 tenants in common to be passed into a QDOT trust at death. If title is held as tenants in common, the will of the first co-tenant to die intestate law will govern the disposition of that 50% interest.

As you can see there are a myriad of choices and the choice you select can have resounding implications, so instead of relying on the settlement attorney to select the type of ownership you may wish to discuss it with your attorney prior to closing.

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