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Lesson 3: Types of Property Interests
Terms in this set (48)
Property can be either tangible or intangible.
Tangible property is property that has a physical presence.
Intangible property is property that can not be touched (stocks, bonds, patents, and copyrights).
Tangible property consists of two categories, real property and personal property.
Real property includes land, houses, and and anything permanently attached to land or a house.
Personal property includes belongings inside the house and other items, such as jewelry, automobiles, and collections of artwor
Intangible property typically represents a right held by the property owner that has a measurable value.
The value of public stocks (intangible property) is calculated from the financial markets.
50% interest in a corporation is a ______ property
commercial rental complex is a ______ property
100 shares of amazon is a ______ property
a expensive guitar is a ______ property
a patent recipe is a ____________ property
Which of the following is/are considered real property?
IV. Land held for investment
III. House IV. Land held for investment
Real property is land and buildings. The nature of the property in the hands of the owner (investment, personal, inventory) does not affect the type of property. Stocks are intangible and automobiles are tangible.
There are many forms of property ownership. A piece of property can have one or multiple owners.
(1), also called absolute ownership or fee simple absolute, is unlimited, unrestricted ownership by one person.
(2) describes property owned by multiple tenants (related or unrelated) or joint tenants with right of survivorship.
(3) includes property owned by married spouses.
1. Sole ownership
2. Tenancy in common
3. Tenancy by the entirety (or community)
Sole Ownership/Fee Simple Absolute
Complete and unrestricted ownership of property by one person.
Owner may use, sell, gift, alienate, convey, or bequeath without any restrictions.
At death, 100% of the property's value is included in the owner's gross estate and probate estate.
Tenancy in Common
-An interest in property held by two or more people (related or unrelated).
-Each tenant holds an undivided interest (an equal right to use the whole property).
-Each tenant's ownership percentage usually reflects the percentage of the tenant's contribution toward the property purchase price. If tenants agree on ownership that is not in proportion to contribution percentage, a gift may have occurred.
Uncle purchases a vacation home for $400,000 and titles the property as equal (50%/50%)______________________with his nephew. $200,000 is deemed a gift to the nephew because the nephew did not contribute toward the purchase price.
tenants in common
Robert and his sister Anne purchase a townhome for $100,000. Robert contributes 80% of the purchase price and Anne contributes the remainder. When Robert dies, the townhome is valued at $200,000. $160,000, or 80% of the fair market value of the home, is included in Robert's gross estate.
Each tenant can sever his/her interest (sell, bequeath, gift) without the other tenant's consent.
Each tenant generally shares in income and expenses relative to ownership percentage.
FMV of ownership interest is included in the gross estate of a decedent and in the probate estate.
If the tenants disagree, they each have the right to partition or sever the property. After they sever, each owner then owns his share fee simple.
Joint Tenancy (JTWROS)
Equal interest in property held by two or more (related or unrelated) parties, with an implied right of survivorship.
-Implied right of survivorship: When one tenant dies, his/her interest automatically passes in equal shares to the surviving tenants as an operation of law (outside of probate).
Joint Tenancy (JTWROS) rules
Percentage ownership of each tenant must be equal, regardless of each tenant's contribution toward purchase.
Each tenant owns an equal undivided interest in the whole.
Each tenant generally shares in income and expenses equally.
Each tenant may sever their own interest (gift, bequeath, sale) without the other tenant's consent. However, unless the other tenant agrees to add the new tenant as a joint tenant with right of survivorship, the tenants will become tenants in common.
If the tenants disagree, they each have the right to partition or sever the property. If they sever, each owner then owns his share fee simple.
Possible gift at inception if contribution of each joint tenant is not equal.
Joan and her two sisters own the family home as __________________________. Each sister owns one third of the property, regardless of how much each sister contributed toward the purchase price. When Joan dies, her one-third interest is split equally between the two surviving sisters.
joint tenants with right of survivorship
Sonia purchases a $400,000 rental property and titles it jointly with right of survivorship with her sister Blaire. Sonia has made a gift of
$200,000 to Blaire.
Frank contributed 75% toward the purchase of a $100,000 rental home. His neighbor contributed the remainder. The home is titled jointly with right of survivorship. Although Frank and his neighbor are equal owners of the home, when Frank dies,
75% of the home's fair market value at the time of his death is included in his gross estate.
Tenancy by the Entirety
-Spousal ownership of property. Similar to JTWROS.
-Neither tenant can sever without consent of the other tenant.
-Right of survivorship implied.
-Transfers outside of probate at death of first tenant.
-Deemed 50% contribution rule (married).
-50% of total value of property included in gross estate of decedent.
-In community property states, marital property (community) is owned jointly. Community Property includes all assets and earnings acquired by either spouse during the marriage.
-Property acquired before the marriage. Whereas, property acquired by gift, inheritance, or legal mandate (eg, settlement) during marriage is not considered community property.
-Income earned from property generally stays the same character as the original property.
-If separate property and community property are commingled, then separate property may be presumed to be community if it cannot be traced back as separate.
-No automatic right of survivorship.
-The entire property receives step-up basis (increase to fair market value) at the death of the first spouse, regardless of who receives the property.
David purchased a rental home before he was married. After marriage, he receives $12,000 in rental income each year from the property. As long as__________________________________, the income will remain separate property in the event of a divorce or David's death.
the rental income is not commingled with the couple's community property,
Nadine and Ben, a married couple, purchased a $30,000 lot. They live in a community property state. When Nadine died 15 years later, the lot is worth $60,000. The entire lot receives a step-up basis to
$60,000. The heir receiving the lot will receive ownership of half of the lot with a basis of $30,000.
Which of the following statements regarding joint tenancy with rights of survivorship is correct?
-Each tenant may bequeath his/her interest in the property at their death
-joint tenancy with rights of survivorship is the same as community property
-only spouses can establish joint tenancies
-each tenant under a joint tenancy with rights of survivorship has an undivided interest in the property
each tenant under a joint tenancy with rights of survivorship has an undivided interest in the property
Joint tenants with right of survivorship have an undivided right of interest in the property. The first choice is incorrect because a joint tenant in a JTWROS can transfer his interest during life, but at death the interest is automatically transferred to the surviving tenants. The second choice is incorrect because JTWROS is not the same as community property.
Community property can only be entered into between a married couple and does not provide an automatic right of survivorship. The third choice is incorrect because anyone can own property as JTWROS, and at the death of one joint tenant, his interest will transfer automatically to the surviving joint tenants.
___________________________ occurs when an interest in property is divided between tenants that is contingent upon on an event or a length of time. When the event occurs (or does not occur), the interest of the first owner ends and the interest of the next owner begins.
Partial or split ownership
Split ownership creates two different interests. The owner who can use or benefit from the property immediately has a (1). The owner who must wait for the period of time to pass or event to occur (or not occur) has a future, or (2). If the original owner of the property possesses the future interest, it is referred to as a (3)
1. present interest
2. remainder interest
3. reversionary interest.
Interest for a life that ceases upon the death of the life interest is referred to as a ______________. A __________ owner has the right to use property and receive income from said property for the defined life. When the life interest ends, the property is transferred to the remainder person.
life estate example
Jennifer's father bequeathed a life interest in the family's farm to Jennifer for her mother's life, and then to Jennifer's daughter. Jennifer has a life interest for as long as her mother is alive. When her mother dies, the farm will pass to Jennifer's daughter. Jennifer has a present interest and her daughter has a remainder interest. The mother has no interest.
A _______________ arrangement bestows ownership based upon the occurrence or non-occurrence of some event.
contingent ownership interest
Bill has always wished for his daughter, Sarah, to become a doctor. In his will, he grants ownership of a vacation home in the Florida Keys to her if she completed medical school by the time of his death. If the condition is not met, the property passes to Sarah's daughter. Sarah has a _______________________and Sarah's daughter has a ___________________________
contingent present interest
contingent future interest.
Interest in property for a number of years is referred to as ________________. After the term of years ends, the term tenant's interest in the property ends and the property passes to the future interest owner.
interest for term
Robin owns a home in Miami. She leaves her boyfriend Matt an interest in her home for a period of 3 years. She feels this will give Matt enough time to get on his feet and find a new place to live. Upon the end of the three-year term, the house will revert back to Robin.
Matt owns a _______________, and Robin owns a ____________.
the right to receive income or other benefits from the property
another form of split ownership occurs when the legal ownership and equitable benefits are split between different individuals. The legal owner has all the control and responsibilities of ownership, including the right to sell the property. The equitable beneficiary receives benefits from the property, such as usage rights, distributions, and income.
This arrangement is commonly found in trusts. The legal owner of assets in a trust is the Trustee. The individuals who receive distributions (income) or other benefits from the trust assets are the equitable owners, or the beneficiaries.
Andrea, who is 75 years old, owns a beautiful home in Palm Beach. She has been dating a younger man named Ashton, who is 23 years old. While drafting her will, she decides to leave Ashton an interest in her home for a period of three years. Andrea believes that three years is enough time for Ashton's career as a social media influencer to take off and he will be able to support himself thereafter. After the three-year period, the property will transfer to her two grandchildren, Arden and Allen. What type of interest has Andrea left Ashton?
A term interest lasts for a specific period of time, such as three years. A life estate lasts for the term of a person's life.
Mandy and Steven had been married for six years. Three years ago, after having their only daughter, Carol, they bought their first home for $250,000. Last year, Steven was killed in a car accident. His will left everything to his daughter. The value of the home at Steven's death was $400,000. Below is how this scenario would transpire under each ownership type:
Dara has owned 100% of the stock of Dara's Baked Goods, a corporation, for 22 years. In the current year, she gifted 50% of the business to her daughter, Sheila, who lives in California with her husband. Sheila does not work at the business and reinvests any income back in the company. With respect to the transfer of the business interest, which of the following statements is correct?
-shiela's 50% interst in Dara's Baked Goods is community property, owned equally by shiela and her husband
-if shiela's husband dies tomorrow, both his shares of dara's baked goods and shield's share of dara's baked goods would receive a step-to fair market value basis
-Sheila owns 50% of Dara's Baked Goods outright and the interest will not be considered community property
-if shiela dies tomorrow, the executor of her state would inclue 25% of the value of dara's baked goods in her gross estate
Sheila owns 50% of Dara's Baked Goods outright and the interest will not be considered community property
The third choice is correct because gifted property is generally considered separate property. The first choice is incorrect because gifted property is generally considered separate property unless Sheila elected to treat the property as community property, or commingled the assets. In this case, Sheila does not commingle the assets and the problem doesn't mention that she elected community property status over the assets.
The second choice is incorrect because Sheila's interest in Dara's Baked Goods will not be included in her husband's gross estate. Separate property is only included in the gross estate of the separate property owner. Because the interest is not in her husband's gross estate, it does not receive a step-to fair market value. The fourth choice is incorrect because if Sheila dies tomorrow she must include 100% of the value of all of her assets owned as separate property (thus 50% of Dara's Baked Goods).
When would a decedent's property be subject to ancillary probate?
If the decedent is a tenant in common in real estate with an unrelated person and the property is located in a state other than the state of domicile
Which of the following states is not a community property state?
All of the other states are community property states.
Teresa and her brother Michael decide to purchase a condo together. They both want to use the condo for family vacations. The price of the condo is $620,000. Michael expects to use the condo 60 percent of the time and Teresa 40 percent of the time. Michael contributed $372,000 and Teresa contributed the balance. Their ownership percentage equals their contribution percentage. Which type of property titling must the condo be to reflect their ownership interest?
Tenancy in common
Tenancy by the entirety
Tenancy in common
JTWROS because they own unequal ownership percentages. Tenancy by the entirety and community property must be owned by married partners.
Cody and Chelsi, who are married to each other, own their home together titled as community property. They purchased the home three years ago for $200,000. After improvements and a surge in the market, the home is now worth $400,000. If Cody died today and left his share of the home to his daughter Alyssa, what is Alyssa's federal income tax basis in the home?
Cody's one-half interest in the home will have a basis of $200,000 due to a step to fair market value of both halves at Cody's death because the property is owned as community property.
Jack and Jill are not married and own farmland titled as joint tenants with rights of survivorship (JTWROS). Jack originally contributed $90,000 and Jill contributed $60,000 toward the purchase price. The land is currently valued at $800,000 and each of them has a 50 percent interest in the property. If Jack died today, what amount of the value of the farmland would be included in his gross estate?
Property owned JTWROS follows the actual contribution rule for non-spouses for inclusion in the gross estate. Therefore, since Jack contributed 60 percent of the property, his estate will include 60 percent of the fair market value (60% × $800,000 = $480,000).
Bob and Charles own a townhouse together and are not married. Charles contributed 30 percent of the purchase price and Bob contributed 70 percent of the purchase price. Each of them has an equal interest in the property. Which of the following are permissible ways they could title the property?
I. Sole ownership
II. Tenancy in common
III. Joint tenancy with rights of survivorship
IV. Tenancy by the entirety
II and III
The property could be titled either as tenancy in common or joint tenancy with rights of survivorship. The property could not be owned as tenancy by the entirety because Bob and Charles are not married. Sole ownership is not an option because there is more than one owner.
Sherri purchased a home many years ago for $100,000. She married Gary five years ago when the house was worth $200,000. Sherri and Gary live in a community property state. Assume Sherri died today and left her entire interest in the property to her son Cody. The property is currently valued at $400,000. What is Cody's basis in the home after Sherri's death?
Gary does not own any interest in the property. Sherri purchased the home before she was married to Gary. At the time of marriage, the property remained Sherri's separate property. When Sherri died, her interest (100 percent) transferred to Cody. Thus, Gary does not own any of the property and does not have any basis in the property. Cody will have a basis of $400,000 (the step-up basis).
Dennis died recently leaving all his assets in a trust for his wife, Sandy. Dennis was concerned that Sandy would not be able to manage her money adequately to maintain her standard of living. Therefore, Dennis placed the assets into a spendthrift trust and gave Sandy the right to receive a certain amount of income each year. Dennis appointed his good friend Richard to be the trustee of the trust. How is Richard's ownership classified?
Richard holds the legal title to the property.
Richard holds the legal title to the property as trustee for the trust. Sandy as the beneficiary holds the equitable title. A life estate identifies the person who has a current beneficial right in the property, which in this case would be Sandy.
A tenancy by the entirety is a property-titling regime that exists between whom?
In those states that allow tenancy by the entirety, it exists only between spouses.
Four people own one piece of property. Which of the following forms of property ownership titling of those listed must they use?
Tenancy by the entirety
Tenancy in common
Tenancy in common
A life estate is only appropriate if the ownership is split between present interests and future interests. It is not appropriate for four concurrent tenants. Tenancy in common is the only one of the choices that allows four owners. Both tenancy by the entirety and community property are between two spouses.
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