Title and taxes

There's more than one way to take possession of a piece of property, each with legal, tax and estate-planning consequences. Once you take possession, it pays to monitor to your property taxes.

It's easy to wait until the last minute to decide how you want to take title to the home you're buying, but it's unwise to do so, especially if you are making the purchase with another person. While your attention may be focused on closing your deal and planning your move, it's important to take some time to look ahead in making this decision.

How you take title involves legal issues, tax consequences and estate-planning repercussions. If you feel you need expert help in making this decision, consult a lawyer or financial adviser.

Taking good title: Choose an option that best fits your circumstances

Sole Ownership: Individual home buyer; Also known as ownership in severalty; owner has sole right to use and dispose of property; Significantly reduces tax liability in most cases; property passes to heirs through probate
Joint Tenancy: Two or more home buyers (married couples and unrelated co-owners often take title this way); Co-owners hold title equally; both must agree on use and disposition of property; Upon death of co-owner, property passes to survivor(s) without going through probate
Community property (available only to Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin residents ): Married home buyers; Owners hold title equally; both must agree on use and disposition of property; Tax liabilities and benefits shared by both; upon spouse's death, half of property goes to survivor and other half to designated heir(s) through probate; if no heirs designated, it passes to survivor
Tenancy by entirety: Married home buyers; Owners hold title equally; both must agree on use and disposition of property; Tax liabilities and benefits shared by both; upon spouse's death, property automatically goes to survivor, who becomes sole owner
Tenancy in common: Unrelated home buyers who are considered co-owners (condominium owners, for example); Co-owners hold title equally or unequally; individual co-owner does not need consent of others to use or dispose of their interest; Tax liabilities and benefits apply to each individual; upon death of co-owner, property passes to designated heir(s) through probate
Partnership: Unrelated home buyers; Partnership holds title; partnership sets parameters for use and disposition of property; partnership not liable for individual circumstances that could affect title, for example, bankruptcy; Tax liabilities and benefits apply to partnership; upon death of one partner, partnership interest passes to designated heir(s), which could be partner(s).

Pin down property taxes

With property taxes on the rise in many states and local jurisdictions, it's a good idea to understand the tax system in your state and to monitor what you are paying. Check with your local tax assessor for information. Property taxes are deductible from federal taxes and from many state taxes, which can add up to a beefy tax advantage in high property-tax areas. However, make sure that your property tax assessment is in line with comparable homes in your area. If property values are declining, for example, you may be paying too much.

Here are three ways to save on your property taxes:

Find out whether your state exempts a portion of your home's value from taxes. Florida, for example, exempts $25,000 per home.
If you are elderly, a veteran or disabled, you may be entitled to a property tax break in your state. Check with your local tax assessor or financial adviser.
Challenge your assessment if you think it is wrong. To find out whether your assessment is too high, look at records of recent sales at the assessor's office or online. As many as 50 percent of taxpayers who appeal their assessment get them cut, saving hundreds of dollars in property taxes. Check with your local tax assessor for procedures to follow.

TIP: If you are buying a house with less than 10 percent down, your lender probably will require that you set up an impound account to collect funds every month to cover the payment of property taxes. Most lenders are reliable, but they can make mistakes. Check your monthly mortgage coupon for the status of your impound account. Ultimately you are responsible for making sure your property taxes are paid.

Living trusts

After you've purchased a home, you may want to transfer your title into a living trust, a mechanism that can spare your heirs probate costs and hassle. You may only make this move after closing because most mortgage lenders will not lend to a trust, only to individuals or corporations. Also, lenders usually require that title to the property be in the names of the individuals responsible for repaying the debt. Owners whose property is in a living trust usually have to transfer title to the property out of the trust in order to refinance their mortgage.

Plan your partnership

If you are buying a house with partners, it's important to set up a partnership agreement that covers all the bases. Issues you'll want to cover include: