Ownership is a state of rights and control over a property, such as land or real estate, object, or intellectual property. In real estate, real property ownership involves multiple rights that include possession, control, privacy and exclusive use, use and peaceful enjoyment, allow others limited right to use through lease, disposition and transfer of the property through selling, inheritance, or donation, and use as collateral through mortgage. These multiple rights are collectively referred to as title. Property ownership can be held by one person or entity, or different parties.
The mechanics and processes that govern real property ownership can be pretty complex; hence, can give rise to various legal questions. For example, there are several ways by which ownership can be established. Each of these legal means differ in several ways and has its benefits and drawbacks. So, whether it is a residential or commercial real estate asset, it is fundamental to know and understand each type before you take over a real property.
Let’s take a quick look at the five most common types of property ownership.
Sole Ownership
This type of ownership is applicable in real estate property wherein a single individual assumes complete rights and interest. It does not have any co-owners or a designated beneficiary. To convey ownership from one owner to another, transfer documents or intestate succession is done. The interest in the property is included in the estate in the event of the owner’s death. Without proper planning, probate fees and estate taxes could reduce the property’s value.
The property’s beneficiary receives a full step-up in basis value. As such, the heir does not need to worry about capital gain in case he or she sells the property. This is because the property was received at current market value.
Here’s a quick example: if a beneficiary inherits a land with a current market value of $1 million, this becomes the tax basis, even if the land was bought at only half of its present cost. This means, the heir will not need to pay for capital gains worth $500,000 in the event the property is sold.
Joint Tenancy
One of the most common types of property ownership, joint tenancy refers to equal ownership rights and interests among several owners or tenants to a property. Each tenant is entitled to equal income and use of the property, as well as the tax and mortgage dues.
The right of survivorship is a fundamental aspect in joint tenancy agreement. In the event of death of one or multiple tenants, the surviving tenant automatically assumes ownership. Right of survivorship makes it easier to pass ownership after death of one owner as compared to compared. For this type of ownership to be established, the property deed or conveyance must specifically state that joint tenancy with rights of survivorship has been created.
A real estate lawyer from Orlando warns that this type of ownership has its disadvantages. Since each tenant has equal ownership rights, creditors can legally seek forfeiture of the property in case one of the tenants had defaulted or unpaid debts. Furthermore, in the event of death, joint tenancies come with tax consequences. The property may be subject to federal and state estate taxes if it exceeds the threshold amount. Joint tenancies also require all owners to equally share in any costs associated with the property. Lastly, when selling the real estate, every tenant needs to accede before the property can be sold.
Tenancy in Common (TIC)
Much like joint tenancy, tenancy in common (TIC) refers to ownership where in two or more individuals jointly hold title and enjoy equal rights to a property during their lifetime. This means, all tenants share every aspect of the property. However, unlike joint tenancy wherein there is only one title, tenants in common hold individual titles for their respective share in the property and can do so whatever they want with it at will. This type of ownership can be executed any time, regardless of when other people become part of the agreement. Ownership can be conveyed to other parties. In the event of an owner’s death, the ownership is transferred to his or her heirs as a whole.
This type of title allows a tenant to use their portion of the property as collateral to raise funds. The creditors apply lien only on the borrower’s specific share of the property. This type of title also makes it easier to sell and purchase since you don’t have to deal with other tenants.
On the other hand, tenants in common do not enjoy right of survivorship. Tenants also share any liability, debts or liens of the property. Further, before the property can be transferred, all liens should be cleared.
Tenants by the Entirety
Tenancy by the entirety is a type of title wherein the wife and husband shares equal ownership rights on a real property and any income derived from it. This title ensures automatic rights of survivorship.
In case of death of either of the spouse, ownership is automatically transferred to surviving spouse in its entirety. However, in case of divorce, they spouses become tenants in common.
One disadvantage of this title is that it requires the consent of both parties when selling or transferring the property. Some consider this as a benefit as no party can unilaterally gain from it.
Community Property
This type of ownership may be used by spouses if they intend to own property together. Either spouse owns rights to one half of the property, which they can convey to the other. Typically, any non-real estate property acquired within the marriage is considered community property to which both spouses own half it.
In common law marriages, real estate properties earned during the relationship are also considered community property. So, in the absence of any legal procedure to specifically change the title, ownership to the real estate become shared by both parties.
These are five common types of property ownership. If you intend to acquire, transfer or will property to any individual, you might need to seek the help of a real estate attorney who can guide you through the process needed for each ownership type.