Real property is different than other personal assets. In fact, real estate ownership can take several forms—each with distinct implications on ownership transfer, financing, collateralization and taxes. Here are the most common ways to hold title to real property and what each means.
Investopedia’s recent article, “5 Common Methods of Holding Real Property Title,” explains that each title method has its pros and cons, depending on a person’s specific situation and how they want ownership to pass after death, divorce, or sale. The most common of these methods of title holding are joint tenancy, tenancy in common, tenants by entirety, sole ownership and community property.
Joint Tenancy is when two or more people hold title to real estate jointly, with equal rights to enjoy the property during their lives. When one dies, their rights of ownership pass to the surviving tenant(s). The advantage of this method is that the parties in the ownership don’t need to be married or related. However, the downside is that any financing or use of the property for financial gain must be approved by all parties and can’t be transferred by will after one passes.
If the parties aren’t married, to get out of the title, they must ask a judge to divide the property or order its sale. 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 to collect on its judgment. Thus, each owner takes a risk in the other’s financial choices.
With Tenancy in Common, two or more people hold title to real estate jointly, with equal rights to enjoy the property during their lives. Tenants in common hold title individually for their respective part of the property and can dispose of or encumber it whenever they want. Ownership can be willed to other parties, and in death, ownership will transfer to that owner’s heirs undivided. It also allows for one owner to use the wealth created by their portion of the property as collateral for financial transactions, and creditors can put liens only against one owner’s part of the property. Any liens on the property must be cleared for a total transfer of ownership to happen.
Tenants by Entirety can only be used by owners who are legally married. This is ownership in real estate, under the assumption that the couple is one person for legal purposes. This conveys ownership to them as one person, with title transferred to the other in entirety, if one passes away. The advantage of this method is that no legal action is required at the death of one’s spouse. The property doesn’t need to be covered in a will, and probate or other legal action isn’t needed. Any conveyance of the property must be done together, and the property can’t be subdivided. In a divorce, this type of title automatically converts to a tenancy in common, so that one owner can transfer ownership of their part of the property to whomever they choose.
Sole ownership is ownership by a person or entity legally capable of holding the title. When a married person wants to own real estate separately from their spouse, title insurance companies will usually require the spouse to specifically disclaim or relinquish their right to ownership in the property. The primary advantage of holding the title as a sole owner, is the ease with which transactions can be made. This is because no one else needs to be consulted to authorize the transaction. The disadvantage is the potential for legal issues in the transfer of ownership, if the sole owner dies or become incapacitated. Unless a will exists, the transfer of ownership upon death can become an issue.
Community Property is ownership by husband and wife during their marriage. Under community property laws, either spouse has the right to dispose of one half of the property or will it to another person. Real estate acquired during a common-law marriage will also be deemed to be held as community property. Anyone who’s lived with another person as a common-law spouse who doesn’t specifically change the title to the property as sole ownership, is in danger of having to share ownership of the property in the absence of a legal marriage.
Community property with the right of survivorship is a way for married couples to hold title to the property. However, it’s only available in Arizona, California, Nevada, Texas, and Wisconsin. It lets one spouse’s interest in community-property assets pass probate-free to the surviving spouse in the event of death.
There are also other ways to hold title to real property. Ownership in real estate can be done as a corporation. The legal entity is a company owned by shareholders but considered under the law as having an existence separate from those shareholders. Similarly, real estate can also be owned as a limited liability company. 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. You can have a limited partnership, where the investors take limited liability by not making managerial decisions on the management or transaction decisions. There will be a general partner, who is responsible for making all business decisions for the limited partners.
Real estate can also be owned by a trust, which is managed by a trustee on behalf of the beneficiaries. If you’re thinking about owning real estate through a business entity, like a corporation, trust or partnership, speak with an attorney to see which ownership structure is the most beneficial for the situation.
Reference: Investopedia (June 5, 2019) “5 Common Methods of Holding Real Property Title”