Real estate is a kind of property that's made up of land, as well as any structure that sits on it. Improvements to the structure also count toward the property. The definition also includes any other resources that may appear on that piece of land including vegetation, livestock, crops, natural resources, and even water.
Real estate can be both commercial and residential. Commercial properties include office buildings, warehouses, shopping centers, and other types of retail space. Residential property, on the other hand, is made up of homes, condominiums, apartments, and any other type of property that is meant for residential living.
People can own real estate for their primary residence or to hold as an investment rental property. But how do you determine ownership of real estate? This is done through a title. So what exactly is a title? This article outlines the different kinds of real estate title as well as less common methods of holding title to real estate property so you can decide which method best meets your needs.
- Title refers to a document that lists the legal owner of a piece of property.
- Titles can be issued to depict ownership of both personal and real property.
- The different types of real estate title are joint tenancy, tenancy in common, tenants by entirety, sole ownership, and community property.
- Other, less common types of property ownership are corporate ownership, partnership ownership, and trust ownership.
What Is Title?
The term title refers to a document that lists the legal owner of a piece of property. Titles can be issued to depict ownership of both personal and real property. Personal property is anything that doesn't include real estate such as appliances, antiques, or artwork. Real property, on the other hand, is anything tangible like real estate. Title for real property must be transferred when the asset is sold and must be cleared for transfer to take place. This means it must be free of liens or encumbrances that could pose as a threat to its ownership.
Title for real property must be transferred once the asset is sold.
Unlike other real property assets, real estate ownership can take several forms, with each having implications on ownership transfer, financing, collateralization, and taxing. Each type of title method 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 like death, divorce, or sale. The most common of these methods of title holding are:
- Joint tenancy
- Tenancy in common
- Tenants by entirety
- Sole ownership
- Community property
Let's take a look at what these types of title mean as well as the pros and cons of each.
Joint tenancy occurs when two or more people hold title to real estate jointly, with equal rights to enjoy the property during their lives. If one of the partners dies, their rights of ownership pass to the surviving tenant(s). Tenants can enter into a joint tenancy at the same time. This usually occurs through a deed.
As mentioned above, the main advantage to entering a joint tenancy is that ownership is passed to the surviving tenant if one passes on. Another benefit to having this method of title in place is that neither party in the ownership needs to be married or related. Furthermore, the responsibility for the property is shared between tenants. That means any financial burden relating to the property belongs to everyone, not just one individual.
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, they must petition the court to divide the property or order its sale in order to get out of the title.
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.
Tenancy In Common (TIC)
With tenancy in common (TIC), two or more persons hold title to real estate jointly, with equal rights to enjoy the property during their lives. So all aspects of the property are shared by the people named on the title. 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. This type of title can be entered into at any time—even years after other people entered into an agreement. 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 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. Another advantage to this kind of title is that it makes purchases much easier.
A TIC doesn't allow for automatic survivor rights, all tenants share the liability for any debts on the property. Any liens on the property must be cleared in order for a total transfer of ownership to take place.
Tenants by Entirety (TBE)
This method can only be used when owners are legally married. Tenants by entirety (TBE) 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 needs to 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.
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.
Sole ownership can be characterized as ownership by an individual or entity legally capable of holding the title. The most common sole ownership is held by single men and women, and married men or women who hold property apart from their spouse, along with businesses that have a corporate structure allowing them to invest in or hold interest in real estate.
For married people who wish to own real estate apart from their spouse, title insurance companies typically require the spouse to specifically disclaim or relinquish their right to ownership in the property.
The main advantage of holding the title as a sole owner is the ease with which transactions can be accomplished because no other party needs to be consulted to authorize the transaction.
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.
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 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 the 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.)
Property With Survivor Rights
Community property with the right of survivorship is a way for married couples to hold title to the 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, one general partner is typically 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.)
The Bottom Line
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 a 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 the 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.)