‘Deed’ or ‘Title’ — Homeowners Are Confused About Ownership Instruments

You can blame “Monopoly” for some of the confusion. That board game taught us all that there is such as thing as a “deed” to a property. With a “deed” to Boardwalk and some houses or a hotel on it, you could charge rent to those who landed on it — and hopefully win the game.

Meanwhile, the Department of Motor Vehicles has taught us that there is such a thing as a “title.” Meanwhile, when you purchase a home, you receive a “title policy” which guarantees “clear title” to your property.

But surprise! There is no such document as a “title” to your home the way there is a title to your car. There is a document called a “deed” but that is the document which transfers ownership, it is not proof of ownership. Sorry, I know this is confusing!

So where is the proof that you own your home? It is held by the Clerk & Recorder of your county, and it’s based on the most recent deed recorded with the county. The only proof that Rita and I own our home in Golden is that the most recently recorded deed transferred the property to us. There is no other document which we have or can produce to prove we own our home.

Last year the state-mandated contract for the purchase and sale of real property changed the way deeds are specified. The agent preparing the contract specifies whether the buyer wants to obtain ownership through one of several deeds.

First is the “Special Warranty Deed,” by which the seller warrants that he is transferring ownership of his property free of any known lien or claim of ownership during the time he/she or they owned the property. That is the most limited type of deed.

The buyer might, however, demand a “General Warranty Deed,” by which the seller is warranting that there is no other claim of ownership (or lien against the property) going back to the beginning of time. 

What you need to know, however, is that, regardless of which type of deed is used to transfer ownership, the buyer should receive an “owner’s title policy” (typically paid for by the seller) guaranteeing free and clear title to the buyer. In other words, it hardly matters which type of deed is used to transfer the property. You’re still protected.

Title insurance differs from other kinds of insurance because it has no term. It is a one-time purchase that covers the new owner of the property forever. It never has to be renewed.

Prior to issuing the title policy, the title company does a “title search” looking for any recorded claim of ownership or lien against the property in question. If a claim or lien is not recorded with the county in which the property is located, it can’t be enforced.

It is possible, of course, that a claim or lien might be overlooked during the title search, but it’s pretty rare. I recall once in 1991 I purchased an older (1905) office building in Denver, receiving a title policy from Land Title Guaranty Company. Within a year or so, I was notified of a lis pendens against the property, but the lawyers for Land Title did whatever they had to do in order to clear it, costing me nothing. Since that time I can’t think of any claims against any title policy held by me or any of my clients — and I’ve had quite a few!

There are other types of deeds beside Special Warranty and General Warranty. If the property is owned by the estate of a deceased person, the property is transferred by a “Personal Representative’s Deed.”  If the property is purchased at a foreclosure auction, it is transferred by a “Public Trustee’s Deed.” If a property is purchased out of bankruptcy, it is transferred via a “Trustee’s Deed.” 

A “Quit Claim Deed” is used when real estate is transferred without being sold for money.  For example, if John Doe were to marry Jane Doe and wanted to put a home he owned in both their names, he could “quit claim” it from John Doe (as “grantor”) to John & Jane Doe (as “grantees”). If they divorce later on, John & Jane Doe might quit claim the house to either John or Jane, with or without a monetary settlement on the side.

With such examples, I hope you now understand that a “deed” is in fact an instrument of transfer, and not a title to property.

Because there is no physical title to real estate, the first thing that a title company does when asked to execute a contract to sell a parcel of real estate is to issue a “title commitment,” which is a document asserting who the recorded owner of the property is and to whom it is to be transferred.

There is one other use of the word “deed,” and that’s for the “Deed of Trust” which a mortgage or other lender has you sign when you take out a loan of any kind which is secured by your home. That document is recorded with the County Clerk & Recorder and is the basis for that official to hold a foreclosure auction if you default on the loan.

I am not a lawyer, and I am providing this information as I understand it from real estate classes and from my experience as a real estate licensee. You’ll want to engage a lawyer if you require further explanation, and I, like any real estate licensee, can refer you to one.

Putting Your Heirs on Title so They Inherit Your Home May Not Be the Best Strategy

It’s a common practice for seniors to add their children or other would-be heirs to the title of their home, but that well-intentioned act could end up costing those heirs increased capital gains taxes when they sell the property later on.

Let me explain.

I’m not a tax advisor or accountant, but I’ve learned the following. If you add an heir to the title of your home as “joint tenant with right of survivorship” and you die, the heir becomes the owner once your death certificate is filed with the county clerk and recorder. But that heir also inherits the “basis” for your home.

The basis is what you paid for your home when you bought it, plus any capital improvements made over the years. When your heir goes to sell your home after your demise, they will be subject to capital gains tax for the increase over that basis.

Let’s say you purchased your home in the 1960s or 1970s for $30,000.  It may be worth over $500,000 now.  Even if the basis is increased to $100,000 thanks to improvements plus the cost of selling it, your heir will pay capital gains tax on $400,000. That comes to about $80,000 in combined state and federal taxes on that $400,000 gain.

However, if you don’t add that heir to the title of your home and let him or her inherit the home through your last will and testament, the basis is stepped up to the home’s value at the time of your death, and that capital gains tax liability disappears.

Talk to your tax advisor and a lawyer about this issue. It is easy to remove your heir from the title to your home through a simple “quit claim deed.”  The form is widely available online.