As a rental property owner, you might wonder about the best way to hold a title in Orange County, California. It’s important to understand the implications of everything from your marital status to the death of a business or life partner.
We’re explaining the seven most common ways to hold title to real estate in Orange County and the ins and outs of title-holding.
What is Title?
Title in real estate describes the actual ownership and rights that a person or persons has to a property. While many people think of the deed as proof of ownership, the deed is actually just a document that serves as a record of ownership. Title is, in fact, the legal ownership of the property. When a person holds title, they will receive a physical deed that states what property is being transferred to them. The type of deed that will be signed depends on how you hold title.
Types of Deeds in California
When property moves from one owner to another, a deed is created and recorded with the County Recorder to ensure the transfer of ownership is noted. Different types of deeds serve different purposes in California. The type of property deed used will depend on the nature of the property transfer.
Let’s go over some of the more common types of deeds you may see.
Grant deed
A grant deed is used when the person currently on the deed transfers ownership or adds a new owner. The grantor (the person transferring the deed) must certify that all property rights are being transferred. When they sign a grant deed, they’re promising that there are no hidden owners or easements on the property.
Quitclaim deed
A quitclaim deed releases or transfers a person’s interest in the property to a new owner, to add an additional owner, or to disclaim or waive ownership in favor of another person. You see this happen most often when a divorced spouse signs a quitclaim deed to relinquish their ownership rights to the family home as part of a divorce settlement.
Quitclaim deeds do not guarantee that the person giving up their claim to the property had valid ownership. However, they do prevent them from claiming an interest in the property in the future.
Interspousal deed
An interspousal deed is a subcategory of grant deeds that gives sole ownership of a property to one spouse or domestic partner. It can also be used to change a property to or from community property in marriages or domestic partnerships and is often used during divorce proceedings to give sole ownership of a community property asset to one spouse.
Trust transfer deed
A trust transfer deed is a subcategory of grant deeds that moves property from an individual to an individual’s trust. Trust creators use it to funnel their property into a trust once it is created.
Transfer on death (TOD) deed
In California, a transfer on death (TOD) deed is a revocable deed used to leave property to designated beneficiaries without the property passing through the probate process. TOD deeds do not transfer ownership at the moment—instead, they take effect when the grantor dies and can be revoked by the grantor at any point during their lifetime.
How to Hold Title in Orange County, California
From real estate sales to inheritances, marriages to business deals, property transfers happen for many different reasons. It’s important to understand the different ways to hold title in California, especially if you are having property transferred to you.
The title-vesting option you choose is a crucial decision because it will affect the following:
- Ownership rights
- Taxes
- Financing options
- How you can use the property
In California, there are seven main ways to hold title. These options include:
- Sole ownership
- Transfer on death (TOD)
- Tenants in common
- Joint tenancy with right of survivorship
- Community property with right of survivorship
- Living trust
- LLC option
Let’s break down these seven choices so you can understand your options.
1. Sole ownership
Sole ownership is a very common way to hold title where a single individual owns the property. One person has an undivided interest in the property. If you hold property under sole ownership, the property will go to probate when you die. The court will then decide how your property is split up or sold.
Some examples of common vesting cases of sole ownership include:
- A single person, an unmarried person, or a widow or widower—a person who is not legally married or in a domestic partnership.
- A domestic partner and their sole and separate property—when a partner acquires property solely in their name.
- A married person and their sole and separate property—when a spouse acquires property solely in their name.
2. Transfer on death (TOD)
Transfer on death (TOD) started in California in January of 2016 (Assembly Bill 139, so it is still a relatively new way to hold title. This is also sometimes referred to as a beneficiary deed. TOD is a probate-free alternative to sole ownership that transfers property directly to a designated beneficiary when the owner dies. The benefit of this is that you are able to pass the property down directly, skilling the probate process.
You do have to meet certain requirements to qualify for a TOD:
- The property must be a single-family home, a condo, a building with two to four units, or a single-family home with no more than 40 acres of agricultural land. It cannot be an apartment building.
- The grantor must sign and date a revocable TOD deed in front of a notary public.
- The TOD deed must be recorded within 60 days from the date it’s signed.
- The grantor may revoke the TOD deed at any time.
3. Tenants in common
Tenants in common is an option for two or more parties who want to share ownership of the property. When a property has tenants in common, it means the ownership is shared, with each owner having their own distinct and transferable interest in the property.
In California, equal contributions aren’t required with this title-vesting option. If two or more people are purchasing a property together but can’t make equal contributions, tenancy in common is an excellent way for them to hold title.
So, if there are three tenants in common, Tenant A could hold a 50% interest in the property, while Tenant B holds 30%, and Tenant C holds 20%.
Unless tenants in common have entered into a legal contract that restricts them from terminating their interest in the property, they can will or sell their shares of the property. This is great when you want to sell, but if you’re the property owner, you have to be prepared to potentially own the property with strangers.
A notable feature of tenancy in common is that owners don’t have a right of survivorship. So, if a tenant in common dies, their part of the property either goes to their heirs via intestate succession or is disposed of through their will or trust.
Different tenants in common may have different ideas surrounding property management, renovations, and rent increases. This can get tricky for all parties involved, especially if you’re working with a professional property management company. We always suggest that there is a point of contact person designated that will make all decisions regarding the property with the management company.
4. Joint tenancy with right of survivorship
Joint tenancy allows two or more people to share equal ownership of a property. In a joint tenancy, each person is equally responsible for any obligations arising from the property, such as debts, maintenance, and repairs.
In California, joint tenancy with right of survivorship is a title-vesting option that can be used by two or more people who are not married or in a domestic partnership.
In a joint tenancy, the right of survivorship is a crucial element. This means that when one joint tenant dies, the other joint tenants automatically gain ownership and usage rights of the deceased tenant’s share of the property. Joint tenancy also avoids probate, which can save you time and money.
5. Community property with right of survivorship
California is a community property state. This means the law considers any property acquired during the course of a marriage or domestic partnership to belong to both partners equally, regardless of who acquired the property.
Community property with a right of survivorship means that when one spouse or partner dies, the surviving spouse or domestic partner automatically assumes full ownership.
If title is held just as community property, then the deceased spouse has the right to dispose of 50% of the property through their will or trust, leaving the surviving spouse with 50% of the property.
There is also a tax benefit to holding title as community property—because you get a stepped-up basis, the taxable gain on your property is the selling price minus that basis. So, your net table gain is much smaller, saving you money.
6. Living trust
A living trust is another way to avoid having a property go through probate. The property is transferred to a trustee who manages the estate outside of probate when the owner dies. This keeps your assets private, but it will cost between $1,000 and $1,500 to set up.
7. LLC option
An LLC is a legal entity created under California law with pass-through taxation, and liability is limited to what the LLC owns. If you have a lot of assets and multiple properties, it is smart to put your properties in LLCs or multiple properties in one LLC..
The LLC option is an expensive choice—it’s $800 a year plus it can cost you $1,000-$1,500 each year to file your taxes as an LLC. But the expense provides you with asset protection which is very important for some people.
So, if a tenant choses to sue you and your rental property is under an LLC, they can only take what the LLC owns. So, your personal property and assets are protected. Whereas if you own the property personally, a tenant can sue you for everything you own including your home, savings, and more.
It’s also important to remember to put any landlord insurance you take out on the property in the name of the LLC—this is essential to ensure you’re properly covered and to keep the claims process easy.
When working with a property management company, all members of the LLC will be required to sign the onboarding paperwork—while this isn’t something that should stop you from working with a property manager, it’s something to keep in mind.
Title Holding Methods and 1031 Exchanges
Title holding can impact how you can perform a 1031 exchange and it’s important for rental property owners to understand the implications.
Here’s how each way to hold title impacts 1031 exchanges:
- Sole ownership: 1031 exchanges are straightforward when there is sole ownership.
- Transfer on death (TOD): The owner can perform a 1031 exchange. Because the beneficiary receives a stepped-up basis, there is no need for a 1031 exchange when inherited.
- Tenants in common: Each co-owner can perform a 1031 exchange on their interest.
- Community property with right of survivorship: Both spouses must be involved in the transaction to complete a 1031 exchange.
- Living trust: While irrevocable trusts may face challenges, if it’s a revocable grantor trust, you can perform 1031 exchange.
- LLC option: LLCs can be complicated when it comes to 1031 exchanges. The entire entity must participate in the exchange as individual partners can’t perform exchanges on their fractional interests.
Comparing Title-Vesting Options
To find the right title-vesting option for you, there are some questions you need to ask yourself:
- Are you single?
- Why do you want to own a property?
- What kind of property are you interested in?
- What are your estate planning goals?
- What are the tax implications of each option?
Every situation is different, and that will help determine which California title-vesting option is ideal for you. Be sure to speak with a lawyer who can help you explore and understand the pros and cons of each option to help you make the best choice.
Download your free Common Ways to Hold Title PDF to compare title-vesting options in California.
Property Management with Good Life
If you ever need to change your property from one type of title to another, working with a property management company can make the process much easier. At Good Life Property Management, we walk you through the paperwork making the process as painless as possible.
At Good Life, we believe life should be enjoyed, not spent sweating the small stuff. That’s why we set out to make property management easy. We care about you, your property, and your tenant. And we do it all so you can Live the Good Life.
Schedule a call to speak with one of our Good Life experts.
Holding Title FAQs
How should I hold a title to my home in California?
There are seven main ways to hold title in California. Which one is best depends on various factors, including marital status, type of property, estate planning goals, and how you plan to use the property. To help make the best decision for you, speak to a lawyer and your CPA.
Can a trust hold title to real property in California?
No, in California, a trust does not, as an entity, hold title to property. When a property is held in trust, ownership is divided with the trustee holding legal title and the beneficiary holding equitable title. Technically, the trust owns nothing.
What is the best type of trust for real estate?
A living trust is the most common and useful trust for real estate. The most significant benefit of a living trust is that it avoids probate after your death.
Steve Welty
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