23. How to Hold the Property

Upon taking title to the property, you will have open to you a variety of ways in which you may hold it. Some times the suggestion will be made that you form a corporation or trust.

The corporate status has many advantages and disadvan­tages. The prime advantage is the freedom from personal lia­bility and responsibility that you enjoy. But this is limited to lawsuits on claims such as people tripping on defective stair­ways. In these cases you are personally free from danger of be­ing sued, since the corporation is the legal owner, not you. You are a stockholder and officeholder of the corporation. But there is no real advantage in this so-called protection. Your insurance will cover these claims and you will be safe in this regard anyway.

If you were a person who stood in fear of being sued for other business debts, you might have some advantage in owning the real estate through a corporation, but this is, from a practi­cal standpoint, the only possible benefit. It is true that the property of the corporation cannot generally be reached to apply to the debts of the individual, even where he controls the corporation.

On the other hand, some folks have tried to acquire real estate by taking title in the name of a newly formed corporation for the reverse reason. A buyer knows that whoever takes title must sign the mortgage and mortgage note. Hence, he forms a corporation, and sets things up through his lawyer so that the Corporation, not he individually, becomes the buyer. He will be surprised when the bank insists that it will not give the loan unless the buyer, personally, signs the note as co-maker with the corporation. Thus the sought-after result is not ob­tained.

From a tax angle, the Corporation has other important dis­advantages. Many exemptions afforded the individual owner are not extended to corporations. In many states, as in Massa­chusetts, the individual who owns real estate is completely free of all STATE income tax on rental income. Even were he to receive a million dollars per month in rental income, it is deemed that the city real estate tax has already taken its bite out of that income, and he does not pay any state income tax on it! By the way, I know of one owner whose holdings grew largely through acquiring Aunt Tobys, and whose monthly rental income IS over a million a month! And most of it to this day is from Aunt Tobys. He started without a dime.

From the federal tax angle there are basic taxes that can usually be avoided by 'draining off the income of the corpora­tion in salaries to the officers so that there is no real disadvan­tage there. However, you will find that the extra bookkeeping, filing of periodic forms such as Certificate of Condition, State and Federal withholding and other musts, will add bother and responsibility where none need exist.

With very rare exceptions, I do not recommend that you in­corporate. Nor is the trust status of any real benefit for the same reasons generally. The benefits of the recommended method of holding title are simpler, less tax finagling is re­quired, and many profitable exemptions will be yours.

There are many varieties of the type of holding that is recom­mended. In many states it is called Ownership by the Entirety. Others call it Joint Ownership. The effects are virtually the same. The property is deeded by the seller to: John Buyer and Amy Buyer, husband and wife, as Tenants by the Entirety, Or to Henry Buyer and Amy Buyer as Joint Tenants (or in Joint Ownership).

Your lawyer will inform you of the wording used in your state when you tell him what you wish to accomplish. When you and your wife (or husband) own in this manner you are in the best position, tax-wise, that is possible. No advantage has been lost, except in the rare case where a husband is at odds with his wife and wants to be able to resell the property with­out requiring her signature. For these cases, your lawyer will recommend a special holding method, legal in your state. But for the run-of-the-mill cases, the so-called partnership with the wife is best.

Should either you or your wife die, there will be important inheritance tax benefits, state and federal. Within certain lim­its, the surviving spouse may claim that there has been no legal inheritance because the property was owned by the entirety. That is, the widow "owned the entire property" with her title waiting to be fully cleared by her husband's death. The reverse is also true, of course. Should the wife die, the husband "owned the entire estate" before her death anyway.

In so-called Dower Rights States, that is, where the law auto­matically endows the wife with dower rights in any real estate owned by the husband (whether acquired before or during marriage) the husband cannot sell nor mortgage his property without his wife's signature anyway. So he gives up no impor­tant freedom by taking title by the entirety.

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