The Pros and Cons with 5 Types of Ownership in Real Property Titles
Unlike personal property, real property – such as real estate or automobiles – is titled to convey ownership. This title must be transferred when the asset is sold and must be cleared (that is, be free of liens or encumbrances) in order for transfer to take place. Unlike other real property assets, real estate ownership can take several forms, each of which has implications on how ownership can be transferred and can affect how they can be financed, improved or used as collateral.
Each of the types of title methods has its advantages and disadvantages, depending on an individual's particular situation and how one wants ownership to pass in the event of such things as death, divorce or sale. The most common of these methods of holding title are as follows:
- Joint tenancy
- Tenancy in common
- Tenants by entirety
- Sole ownership
- Community property
This article will examine these and other, less common methods of holding title to real estate property so you can decide which method best meets your needs.
Joint tenancy occurs when two or more people hold title to real estate jointly, with equal rights to enjoy the property during their lives; in the event of the death of one of the partners, their rights of ownership pass to the surviving tenant(s).
The advantage of this method is that the parties in the ownership need not be married or related.
The downside is that any financing or use of the property for financial gain must be approved by all parties and cannot be transferred by will after one passes. If the parties are not married, in order to get out of the title they must petition the court to divide the property or order its sale.
Another large disadvantage is that a creditor who has a legal judgment to collect a debt from one of the owners can also petition the court to divide the property and force a sale in order to collect on its judgment. In other words, each of the owners takes a risk in the other's financial choices. (Read more in "The Benefits And Pitfalls Of Joint Tenancy.")
Tenancy In Common
With tenancy in common, two or more persons hold title to real estate jointly, with equal rights to enjoy the property during their lives. Unlike joint tenancy, tenants in common hold title individually for their respective part of the property and can dispose of or encumber it at will. Ownership can be willed to other parties, and in the event of death, ownership will transfer to that owner's heirs undivided.
Tenancy in common allows for one owner to use the wealth created by their portion of the property as collateral for financial transactions, and creditors can place liens only against one owner's particular portion of the property.
Any liens on the property must be cleared in order for a total transfer of ownership to take place.
Tenants by Entirety
This method can only be used when owners are legally married.Tenants by entirety is ownership in real estate under the assumption that the couple is one person for legal purposes. This method conveys ownership to them as one person, with title transferred to the other in entirety if one of them dies.
The advantage of this method is that no legal action need take place at the death of one's spouse. There is no need for a will, and probate or other legal action isn't necessary. (Read about how to avoid this expense in your estate plan in "Skipping out on Probate Costs.")
Conveyance of the property must be done together and the property cannot be subdivided. In the case of divorce, this type of title automatically converts to a tenancy in common, meaning that one owner can transfer ownership of their respective part of the property to whomever they wish. (Read about the dangers of fraudulent conveyances in "Protect Your Personal Assets.")
Sole ownership can be characterized as ownership by an individual or entity legally capable of holding title. The most common sole ownerships are held by single men and women, married men or women who hold property apart from their spouse, and businesses with corporate structure allowing them to invest in or hold interest in real estate. (Learn more in "The Basics of Corporate Structure.")
In the situation of married persons wishing to own real estate apart from their spouse, title insurance companies will typically require the spouse to specifically disclaim or relinquish their right to ownership in the property.
The main advantage to holding title as a sole owner is the ease with which transactions can be accomplished, because no other party need be consulted to authorize the transaction. (Learn how you can go out on your own in "Start Your Own Small Business.")
The obvious disadvantage is the potential for legal issues regarding the transfer of ownership should the sole owner die or become incapacitated. Unless specific legal documentation such as a will exists, the transfer of ownership upon death can become very problematic. (Learn more in "Why You Should Draft A Will.")
Community property is a form of ownership by husband and wife during their marriage that they intend to own together. Under community property, either spouse has the right to dispose of one half of the property or will it to another party. Outside of real estate, property acquired during one's marriage is usually deemed community property.
Real estate that is acquired during a common-law marriage will also be considered to be held as community property. Anyone who has lived with another person as a common-law spouse and doesn't specifically change title to the property as sole ownership (which is legally transacted with approval by the significant other) takes the risk of having to share ownership of the property in the absence of having a legal marriage. (Common-law couples should also read "Estate-Planning Must-Haves For Unmarried Couples.")
Community Property With the Right of Survivorship
Community property with the right of survivorship is a way for married couples to hold title to property, although it is only available in the states of Arizona, California, Nevada, Texas and Wisconsin. It allows one spouse's interest in community-property assets to pass probate-free to the surviving spouse in the event of death. (Read more in "The Tax Benefits of Having a Spouse.")
Other Ways to Hold Title
Entities other than individuals can hold title to real estate in its entirety:
- Ownership in real estate can be done as a corporation, whereby the legal entity is a company owned by shareholders but regarded under the law as having an existence separate from those shareholders. (Read more about this structure in "Should You Incorporate Your Business?")
- Real estate can also be owned as a partnership. A partnership is an association of two or more people to carry on business for profit as co-owners. Some partnerships are formed for the express purpose of owning real estate. These partnerships can also be structured as limited partnerships, where investors take limited liability by not making managerial decisions regarding the management or transaction decisions. In these cases, there will be a general partner that is responsible for making all business decisions on behalf of the limited partners.
- Real estate also can be owned by a trust. These legal entities own the properties and are managed by a trustee on behalf of the beneficiaries to the trust. There are many advantages and disadvantages to holding real estate that falls outside the scope of this article, but all have to do with benefits surrounding managerial influence, financial and legal liability, in addition to tax considerations. (For further reading, check out "The REIT Way.")
Title to real estate is the method in which ownership is conveyed and transferred during real estate purchases and sales. The methods of owning real estate are determined by state law, so individuals trying to determine the best method to acquire and hold real-property titles should conduct research to determine the unique differences for each method as set out by their state.
For those considering owning real estate through a business entity, such as corporation, trust or partnership, it is advisable to consult real estate, legal and tax professionals to determine which ownership structure is the most beneficial for their particular situation.
In the event of sole and joint ownership by individuals, prospective owners should consider how their titles should or could be transferred, either by sale or in the event of death, before one method is chosen over another.
To continue reading about real estate, see "Encumbrances and Nonpossessory Interests In Real Property" and "Five Things Every Real Estate Investor Should Know."