What’s the Best Way to Hold Title on an Investment Property?

Acquiring an investment property is a significant step toward building wealth. One of the key decisions you’ll face is how to hold the title. How you decide to hold the title affects everything from liability protection to tax implications, so it’s essential to understand your options to protect your investment. Here’s a rundown of some of the most common title-holding methods and how each might benefit your unique investment strategy.

Individual Ownership

The first option is to hold the title as an individual. This option is best suited for investors purchasing a single property with minimal liability concerns or investors who plan to sell or transfer ownership quickly.

Pros:

• Simplicity: Holding the title in your own name makes paperwork straightforward and gives you direct ownership rights.
• Lower costs: There’s no need for additional legal documents or fees associated with forming an entity.

Cons:

• Liability exposure: Holding title individually means that if legal issues arise related to the property (such as tenant injuries or property damage), your personal assets may be at risk.
• Limited estate planning benefits: While it’s straightforward, individual ownership lacks the estate planning advantages that other options may offer.

Joint Tenancy

When buying real estate with a spouse, partner, or friend, you might consider holding the title as “joint tenants with right of survivorship”. This option would work for co-investors who want a simple arrangement and aren’t concerned about unequal ownership shares.

Pros:

• Automatic transfer: If one owner passes away, their share is automatically transferred to the surviving owner without the need for probate.

Cons:

• Limited flexibility: Since joint tenants must hold equal shares, this can complicate decision-making.
• Potential tax consequences: If the property is sold, capital gains taxes will apply. There may be gift tax implications if ownership is transferred between parties during their lifetimes.

Tenancy in Common

For multiple investors seeking to hold titles together, Tenants in Common is a flexible option allowing each person to hold an individual interest in the property. Tenancy in Common is ideal for co-investors or family members with differing ownership stakes who want flexibility in managing their interests.

Pros:

• Customizable ownership: Each owner can hold a specific share, making it suitable for investments with varying contributions.
• Transferability: Owners can transfer or sell their shares independently of one another.

Cons:

• Potential for disputes: Decision-making may be challenging when multiple owners are involved, especially if they have different goals.
• Estate planning concerns: Ownership shares do not transfer automatically if an owner dies, which may lead to probate issues unless other estate planning mechanisms are in place.

Trust Ownership

Holding the title in a trust can be beneficial for investors focused on long-term estate planning and asset protection. Trusts are ideal for investors who are interested in passing assets to heirs smoothly and minimizing estate taxes while preserving privacy.

Pros:

• Privacy: Trusts are private arrangements, meaning property ownership is less visible in public records.
• Probate avoidance: Assets held in a trust can avoid the probate process, allowing for a smoother transition upon the owner’s death.
• Estate planning flexibility: Trusts can be structured in various ways to accommodate estate and tax planning goals.

Cons:

• Complexity and cost: Establishing a trust requires careful planning and may involve upfront and ongoing expenses.
• Management: Depending on the trust type, it may require regular management to ensure that it aligns with changing laws or the owner’s needs.

Limited Liability Company (LLC)

An LLC offers a practical solution for holding an investment property title, especially for investors who prioritize liability protection. LLCs may work for investors holding rental properties or those seeking asset protection, particularly when there is concern over potential liability or multiple properties involved.

Pros:

• Liability protection: LLCs provide personal liability protection, which means creditors can’t pursue the personal assets of LLC members.
• Pass-through taxation: LLCs are often taxed as pass-through entities, potentially avoiding double taxation.

Cons:

• Complexity and cost: Forming and maintaining an LLC involves additional paperwork, fees, and ongoing compliance requirements.
• State regulations: LLC regulations and tax treatments vary by state, so it’s essential to consult with a knowledgeable attorney or tax advisor.

Seek Legal Counsel

Selecting the best way to hold title on an investment property depends on your unique goals, the number of properties you own, your tax situation, and your estate planning strategy. For many, combining an LLC with a trust offers both liability protection and estate planning benefits, making it an ideal structure for long-term investors.

Before deciding, consult with an experienced estate planning attorney. They can guide you on the best title-holding option for your unique needs, helping you navigate state-specific regulations, tax implications, and your long-term investment strategy. With the right planning, you’ll ensure your property is not only protected but also positioned to support your financial goals well into the future.

If you have any questions about the best way to hold title on an investment property, feel free to contact our law firm.

Law Offices of Daniel A. Hunt

The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10,000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.