Different Ways to Hold Real Property
Explore the legal options for holding title to real property and choose the structure that best secures your investment.
How to Hold Title to Real Estate
You may have heard expressions along the lines of adding or removing people from “title.” These expressions refer to the names which appear on recorded deeds, usually in a county’s recording system. But there are different types of deeds which confer different kinds of interests from a legal perspective. There are also different ways, or “capacities,” for naming people on deeds. This article briefly explores some of these distinctions highlighting key differences in legal rights, risks, and tax consequences.
Types of Deeds
A deed is a formal, written document used for transferring ownership interests in real estate. In Washington state, deeds must satisfy statutory requirements to be recordable. The different types of deeds represent different bundles of rights being conveyed:
Warranty Deed
This type of deed is typically used in ordinary, arm’s-length transactions. It conveys the most rights and interests, including a warranty that no superior claims to the property exist.
Bargain & Sale Deed
This type of deed may also be used in ordinary, arm’s-length transactions. But it conveys fewer rights and interests and only warrants that no superior claim is known at the time of the sale.
Quitclaim Deed
This type of deed simply conveys whatever ownership interest the grantor has, if any, without ensuring the title is clear of liens or other claims. Quitclaim deeds are commonly used between family members, divorcing spouses, and to clear up other title issues.
Transfer on Death Deed (TODD)
This is a relatively uncommon type of deed not recognized in all states. In Washington, TODDs are used for estate planning purposes to allow a property owner to reconvey the property to themselves with a named beneficiary who will take title upon death. Such a transfer occurs prior to and outside of probate. Unlike other instruments, these do not vest any future interests and are revocable during life.
Deed of Trust
These are security instruments more akin to mortgages. In a deed of trust, the right to nonjudicial foreclosure is recorded as in possession of a third-party trustee for the benefit of a lender who has accepted a borrower’s title in the real property as collateral.
Types of Interests
Generally, what distinguishes the types of ownership interests in real estate is the difference in what happens to one owner’s share when they die. But there are finer details too:
1. Joint Tenancy (With Right of Survivorship)
Washington disfavors this kind of tenancy, it will not be created unless an instrument expressly states the intent and the four unities of time, title, interest, and possession are present. Each joint tenant may use and/or mortgage the entire property. In Washington, the right of survivorship is necessarily implied and cannot be excluded–A deceased joint tenant’s interest is evenly split among survivors.
2. Tenants in Common
Unlike joint tenancy, there is no automatic right of survivorship—when an owner dies, their share goes to their heirs, not the other co-owners. This is the default and heavily presumed type of interest created when multiple people own the same property in Washington. Each tenant in common has an undivided interest in the whole property equivalent to their percentage interest, which need not be equal. Think of each TIC interest sort of like a virtual property that can be transferred, or encumbered, separately.
3. Things to Consider When Dealing With Community Property
In Washington, Tenancy by the Entirety, a historic method of recognizing marital property, particularly in a marital home, has been abolished and superseded with the community property system.
4. Life Tenancy
This type of interest in real estate is the opposite of a TODD. Here, the interest is the right to possess and use a property for life. But, upon death, all rights return to the grantor, who remains the owner.
Types of Entities
Individual
This is the simplest way to hold property and is how most personal residences are held. Like it sounds, each owner holds their interest personally in their own individual names.
Single Member LLC
This is functionally identical to holding property individually for tax purposes–The single member LLC is a disregarded entity for tax purposes, which means it is treated as if it does not exist. Outside of that, though, the LLC form allows for the appointment of a manager, company ownership can be transferred without re-titling, and there is some liability protection.
Multi-Member LLC
This is like a single member LLC except an operating agreement will govern how the members interact with each other and resolve disputes. The LLC may also elect how to be treated for tax purposes with the default being as a partnership, which passes incomes and expenses through to individual members according to their interests.
Trust
A trust is a separate entity that exists to hold the assets of a grantor, or trustor, for the benefit of a beneficiary, and managed by a trustee. Trusts are helpful for bypassing probate and, if irrevocable, can have other economic benefits.
Some Key Points
- Tenancy in common (TIC) is useful for fractional ownership in investment properties. Unlike an LLC, TIC holders have a direct real estate interest, making the interest 1031 eligible. But note, LLCs, trusts and other entities can be used to own TIC interests.
- In addition to the default marital community presumptions, Washington also has homestead laws that provide additional protection for primary residences, such as a marital home. In those circumstances, each spouse is required to sign any instrument transferring any interest, regardless of type.
- LLC liability protection works one-way, and only if formalities are followed. It shields personal assets from business liabilities and prevents risks from spreading to other investments.
- For tax benefits, a trust must generally be irrevocable and benefit someone other than the trustor, or grantor. Trusts can also use LLCs and other entities for added protection and flexibility.
- Rental income is typically considered passive investment income, regardless of structure. However, owner-operators who provide extra services may benefit by splitting earnings between salary and profit distributions.
How Should You Hold Title
to Your Real Estate?
With all the options, it can be difficult to figure out what choices are best for your unique circumstances. Especially where there often is not one best answer. If you have questions about optimizing a transaction or structuring your real estate portfolio, contact Cascade Counsel for a consultation to learn more about your options.
