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To protect real estate assets, be prepared

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When life-changing events occur — marriage, divorce, death, incapacity, interstate moves or estate planning — a little bit of legal housekeeping goes a long way toward protecting your ownership and preserving your enjoyment of your real estate. The legal housekeeping will vary from event to event and person to person. It can be as simple as reviewing your deed to make sure it’s current or as complex as preparing a full-blown estate plan. Regardless of your situation, there are some “universal truths.”

Couples who own real estate before marriage may take advantage of a particular form of title known as “tenancy by the entirety.” The owner spouse simply deeds the property to both spouses jointly as “husband and wife, tenants by the entirety.”

Ideally, the deed should contain those exact words to avoid ambiguity. Holding real estate as tenants by the entirety protects it from creditors who have a judgment against one spouse. The only way that a creditor can attach a home owned by tenants by the entirety is to obtain a judgment against both spouses. The only exception is if the creditor is the Internal Revenue Service. Generally speaking, these inter-spousal transfers are tax-free.

Divorce has its own set of legal housekeeping chores. In a divorce, tenancy-by-the-entirety status is automatically severed, and the property is deemed to be owned by tenants in common. Any judgments against one spouse go against that spouse’s interest in the home. Therefore, divorcing couples need to investigate whether there are any existing or potential judgments that could immediately affect the property. This issue, among many others, should be raised by the couple’s divorce attorneys and resolved in the property settlement agreement.

Once death or disability occurs, it’s often too late to take meaningful action to avoid costly probate or conservatorship proceedings. By failing to take some basic legal housekeeping steps now, you run the risk that your wishes about the inheritance of your property might not be enforced after you die. Without proper planning, it’s possible that your home might go to unintended heirs — or even worse, escheat to the state.

Your first step is to locate and review your current deed. Don’t worry if you cannot find the original document; in virtually all jurisdictions, deeds are recorded and publicly available, often online. In the District, the Recorder of Deeds makes deeds available online for $4 per document. In Maryland, deeds are free. In Virginia, the clerks of the county courts administer land records, and charges and availability vary from county to county. A useful site for conducting deed searches in Virginia is http://publicrecords.onlinesearches.com.

Once you locate your deed, look to see who is named on it. Although this might seem obvious, it’s surprising how many deeds contain names of owners who died years or even decades ago. If property is owned jointly as tenants by the entirety or as “joint tenants with rights of survivorship” (JTWROS) when one owner dies, the survivor becomes the sole owner of the entire property. (Note that this is not the case with tenants in common.) The survivor need not take action to become the sole owner. However, it’s good practice to either place a copy of the death certificate in the land records — so that future title searchers will know what happened to the former owner — or to prepare and record a simple confirmatory deed that updates the “chain of title.”

For the most part, moving out of state does not require any particular changes in your real estate title or ownership. But when you sell, the state may significantly affect how much money you keep. This is particularly true for Maryland homeowners who move out of state and establish outside residency before selling their Maryland homes. Such sales by non-Maryland residents are subject to the 6.75 percent Maryland withholding tax on the net sales proceeds.

At the federal level, there is a similar tax, established by the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which applies to non-U.S. citizens, including nonresident aliens, selling U.S. real estate. Those sellers are hit with a 10 percent withholding tax on the gross sales price.

With proper planning and some legal housekeeping, these taxes can be minimized or avoided altogether. In each case, if the homeowner can demonstrate that the tax liability will be less than the withholding amount, an exemption certificate can be requested from the taxing authorities. In Maryland, exemption forms can be obtained online. IRS form 8288B is available online.

Estate planning is a broad topic that will often include a real estate component. But even the most brilliant estate plan will do you no good unless the real estate assets are conveyed in accordance with the plan. Make sure that after your comprehensive estate plan is established, that you implement the real estate component by conveying the property into the appropriate trust or by re-titling the property to allow for any gift provisions. Too often, I have heard complaints that “we forgot to convey this piece of property into the trust” and, thus, the estate plan’s benefits were not fully achieved.

Taking one or more basic legal housekeeping steps can make the difference between housekeeping and “house losing.”

Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.

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