If you’re the owner of a fee simple estate in land, you can own it individually or by two or more co-owners. Now your type of ownership determines your legal right to sell without the other owner’s consent. Even you right to choose the property after your death, and the future rights of creditors. Adding to the all that, the type of ownership also has tax implications. This is an important part of the real estate business. We will cover things like joint tenancy, a syndicate, tenancy by the entirety and even general partnerships.
Before we get start, if you need a refresher on to acquire or transfer real estate title, we got you!
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The Importance of Form of Ownership
Now the form in which a property is owned is really important. Especial to real estate brokers and salespersons for two reasons:
- The form of ownership existing at the time a property is sold determines who has to sign the documents involved. Now this includes the listing contract, acceptance to offer to purchase, or sales contract and deed.
- The purchaser must determine in what form title is taken.
Parties in a marriage have alternatives that are affected by state law. Remember, we’re all subject to the law. So, the available forms of ownership are controlled by the laws of the state in which the land is located. When you have questions regarding holding ownership, you seek out an attorney.
However in most states, real estate can be owned in three basic forms: (1) in severalty, where title is held by one owner; (2) in co-ownership, where title is held by two or more persons; or (3) in trust, where title is held by a third person for the benefit of another.
Ownership in Severalty
Now if a property, or if you are the sole owner of a property where the title is vested in one person or organization, then its owned in severalty. Got to remember each state has special laws that affect title held in severalty by either husband or wife. Now if you’re married, in most states, when a husband or wife owns property in severalty, the souse has to join in signing the documents. These are the three reasons for that:
- To release dower or curtesy in states that have such rights.
- To release homestead rights in states that provide a homestead exemption.
- When the other spouse is a minor (in a few states, only the owner’s signature is needed).
Co-Ownership
So there are situations where a title to a parcel of real estate is vested in two or more parties. When you have that situation, these persons or organizations are said to be co-owners, concurrent owners. Each of these co-owners share in the rights of ownership, possession, and on. However, there are several forms of co-ownership, that each have their unique legal characteristics. Here are the forms of co-ownership most commonly recognized by various states:
- Tenancy in Common,
- Joint Tenancy,
- Tenancy by the Entirety,
- Community Property, and
- Partnership Property.
Tenancy in Common
When you have a parcel of real estate that’s owned by two or more people as tenants in common, each owner holds an undivided interest in severalty. That only means that each owner’s portion of interest is held as if they were the sole owners. Adding to that, there are two important characteristics of this form of ownership.
Characteristics
First and foremost, your ownership interest of a tenant in common is an undivided interest. You can hold a one-half interest in a property, but it’s actually impossible to physically distinguish which specific half. The deed creating that tenancy in common can state which portion of interest held by each co-owner. But if no fractions are stated and two people hold title to the property as co-owners, then each has an undivided one-half interest. Similarly, if six people hold title, then each would own an undivided one-sixth interest.
Second, each owner holds an undivided interest in severalty and can sell, convey, mortgage, or even transfer interest without consenting the other owners. When a co-owner dies, the undivided interest passes to heirs or devisees all according to the deceased’s will. So, the interest of a deceased tenant in common doesn’t pass on to another tenant in common, unless the surviving co-owner is an heir, devisee, or purchaser.
Final note, if two or more people acquire title to a parcel of real estate and the deed of conveyance does not identify the form of tenancy created then, by operation of law, the grantees usually acquire title as tenants in common. It differs for husband and wife though.
Joint Tenancy
Now a joint tenancy, is an estate or unit of interest, in land owned by two or more persons. This is based on unity of ownership. Only one title exists, and its vested in a unit made up of two or more persons. Now the death of one of the joint tenants does not destroy the unit. It just reduces by one the number in the owning unit. The remaining joint tenants receive the interest of the deceased tenant by right of survivorship. This goes on until the last survivor dies and at that point the property goes to the heirs or devisees.
Creation of Joint Tenancies
A joint tenancy can only be created by grant or purchase through a deed of conveyance or by devise. That is giving the property by will. It can’t be implied or created by the operation of law. It’s important that the conveyance must specifically state teh intention to create a joint tenancy. The grantees or devisees have to be explicitly identified as joint tenants. For example, typical wording in a conveyance creating a joint tenancy is like this, “to B and C as joint tenants and not as tenants in common.”
These four unities of ownership are required to create a valid joint tenancy:
- The Unity of time – all joint tenants acquire their interest at the same time.
- The Unity of title – all joint tenants acquire their interest by the same instrument of conveyance.
- Unity of interest – all joint tenants hold equal ownership interests.
- Unity of possession – all joint tenants hold an undivided interest in the property.
Termination of Joint Tenancies
A joint tenancy is destroyed when any of the four unities of ownership are destroyed. The interesting part is that joint tenants have the legal right to convey their interest. But doing that destroys the unity of interest, and voids the joint tenancy. The new owner will be a tenant in common, but the original owners will still be joint tenants. You can’t run from the law! A joint tenancy can be terminated by the operation of law. Either through bankruptcy or even foreclosure sale proceedings.
Also joint tenants or tenants in common who wish to terminate their co-ownership can file a suit to partition the land. Now the right of partition is a legal way to dissolve a co-ownership when parties do not voluntarily agree to its termination.
Tenancy by the Entirety
A tenancy by the entirety is a special joint tenancy between husband and wife. These are the characteristics that set this one apart.
- The owners must be husband and wife;
- The owners have rights of survivorship;
- During the owners’ lives, title can be conveyed only by a deed signed by both parties. One party can’t convey a one-half interest.
- There is generally no right to partition.
Just like a joint tenancy, an operation of law can’t create a tenancy by the entirety. It has to be created by grant, purchase, or devise. At this point most states now require that the intention to create a tenancy by the entirety has got to be specifically stated in the original document. Or else the tenancy in common usually results.
Community Property Rights
Next up, we got the community property rights. This originates from Spanish law. It also has been adopted by eight western and southern states: Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington and Louisiana. See now, community property law is literally based on the concept that a husband and wife, are equal partners. As opposed to merging into one entity. So, if you buy any property during a marriage its actually considered to be obtained by mutual effort.
So, the states that have community property law recognize two kinds of property. Separate property which is solely owned by either spouse before the marriage. Or if it is acquired by a gift or inheritance during the marriage. Any separate property also includes any property you purchased with separate funds during your marriage.
Now community property is all other property both real and personal that is acquired during the marriage. Any conveyance or encumbrance requires both signatures. When one spouse dies, the other half owns one-half of the community property. The other half gets distributed to anyone stated in the will.
Trusts
In most states. title to real estate can be held in a trust. A trustor is the person originating the trust. A trustee is the one who receives the title and own the property. A beneficiary is a person or persons who benefits from the trustee. How you create a trust is when, the trustor will convey title to a trustee who will own it for the beneficiaries. The trustee is a fiduciary and has a special legal relationship with the beneficiaries. An individual or corporation can be a trustee, like a trust company.
So the trustee only has as much power that the instrument gives it that created the trust. A deed in trust, trust document, will or trust deed can be the instrument. Lastly, trusts can be classified as (1) living and testamentary trusts, (2) land trusts, or (3) business trusts.
Check this article out on how they’re using land trusts to preserve some affordability in Brooklyn, NY. Little-Used Community Land Trust Model for Affordable Housing May See Big Boost
Living and Testamentary Trusts
Simple enough, a living trust is created by agreement during the property owner’s life. A testamentary trust is established by will after that person’s death. Property owners can provide for their own financial care and/or that of their families by establishing a trust.
So the individual makes an agreement with a trustee in which the trustor convey’s the deceased’s assets or a certain portion of them to the trustee. This is done with the understanding that the trustee will assume certain duties. Part of these duties, include the care and investment of the trust assets to produce an income. So after the payment of the operating expenses and trustee’s fees, the income is paid to or used for the benefit of the beneficiaries. Trust can continue for the lifetime of the beneficiaries.
Land Trusts
Next is the land trust. This is actually permitted by few states. The thing that sets this apart is that the public records do not indicate the beneficiary’s identity. This usually only done by individuals, but corporations can be beneficiaries. Land trusts generally continue for a definite term, like 20 years. At the expiration date of the term, if the beneficiaries don’t extend the trust term, the trustee is obligated to sell the real estate. Then after distribute the net proceeds to the beneficiaries.
Business Trusts
Last is the business trust. Now when used in a syndication its usually designated as a real estate investment trust (REIT). These trusts pool a variety of large-scale income producing properties and sell shares to investors. The distinct benefit is that REITs are exempt from corporate taxation of profits as long as it distributes at least 95% of its income to the investors.
Business Entity Ownership of Real Estate
Most are familiar with different business entities. A business entity is an organization that exists independently of its members. Business organizations can be categorized as partnerships, corporations, or syndicates.
Partnerships
There are two types of partnerships. A general partnership, is when all partners participate to some extent in the operation and management of the business and may be held personally liable for business losses and obligations. A limited partnership includes general partners as well as limited, or silent, partners. The business is run by both general and limited partners, but the limited partners do not participate. They can also be held liable for the business’s loses only to the extent of their investment.
Corporations
Now a corporation is an artificial person, or legal entity. This is created under the authority of the laws of the state where it gets its charter. Now because it is a legal entity, real estate ownership by a corporation is an ownership in severalty or as a tenant in common.
Limited Liability Companies (LLCs)
This combines features of limited partnerships and corporations. Members of an LLC enjoy the limited liability offered by a corporation, the tax advantages of partnership, and flexible management without the complicated requirements of S corporations or limited partnerships.
Syndicates
To put it simply, a syndicate is a joining together of two or more persons or firms in order to make and operate a single real estate investment. This can also be called a joint venture. Its actually not a legal entity in itself, but it can be organized into many ownership forms like co-ownership, partnership, trust, or corporation. REITs are formed to pool a number of different properties whereas syndicates is formed to purchase one particular property.
Cooperative and Condominium Ownership
The country’s population grew rapidly and most concentrated in urban areas. So, that increase gave way to multiple unit housing, in high rise buildings within the city and low rise apartment complexes in adjoining suburbs. Because of the traditional urge to own a part of the land, also with tax advantages that it comes with , that gave way to cooperative ownership and more recently the condominium for of ownership.
Condominium Ownership
This form has gained increasing popularity. Condominium laws, have been enacted in every state. Under these laws, the owner owns a fee simple title to unit. Also a specified share of the indivisible parts of the building and land, called the common elements. The individual unit owners own these common elements together as tenants in common.
This form of ownership is more common for residential communities. But it can be used for many properties like office buildings, retail stores, etc.. Now the common elements include the land, walls, hallways, elevators, roof, and stairways.
To create a condominium, a condominium declaration and a plat of subdivision are recorded in the county its located. The declaration will set the rights and obligations of each owner.
Covenants, Conditions, and Restrictions (CC&Rs)
A developer of a condominium project draws up a list of restrictions that affect all purchasers. These are called covenants, conditions, and restrictions (CC&Rs). This will address issues like what vehicles are permitted in the parking area, and what alterations homeowners may make to the exterior of their units. The CC&Rs should be recorded with the deed.
A condo unit is owned in feel simple and can be held by one or more persons in any type of ownership or tenancy recognized by state law. Real estate taxes are collected on each unit as an individual property.
Default in payment of taxes or a mortgage loan by a unit owner may result in a foreclosure sale of the owner’s unit. However, it won’t affect the interests of the other unit owners.
A condominium is generally administered by an association of unit owners. This is established in the condominium declaration. This association is responsible for the maintenance, repair, cleaning, sanitation, and insurance of the common elements. Even the structural portions of the property.
These expenses are paid by the unit owners. They usually come in the form of monthly assessments collected by the owner’s association.
Time-Share
Lastly, timeshare ownership allows multiple purchasers to own undivided interests in real estate. This comes with a right to use the facility for a fixed or shifting periods. This is generally for like one or two weeks each year.
In Closing..
There are many ways, you are able to hold title in real estate. Each can benefit you in different ways. Also important to understand, when investing in real estate, the different legal entities there are. Its important things to know overall.
Thanks for reading!
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