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.
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 he wants ownership to pass after death, divorce, or sale. The most common methods of holding title 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 property jointly, with equal rights to enjoy the property during their lives. When one dies, his rights of ownership pass to the surviving tenant(s). Often, spouses hold title to property as joint tenants (although anyone can hold title to property in this way). The advantage of this method is that the transfer to the survivor is essentially automatic and does not require a probate. However, the downside is that any financing or use of the property for financial gain must be approved by all parties and the interest in the property can’t be transferred by the decedent upon death. In addition, a creditor who has a legal judgment to collect a debt from one of the owners can put a lien on the real property and 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 property 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 transferred upon death to other parties. 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 property, 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. No probate or other legal action is 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 his part of the property to whomever he chooses.
Sole ownership is ownership by a person or entity legally capable of holding the title. When a married person wants to own real property separately from his spouse, title insurance companies will usually require the spouse to specifically disclaim or relinquish her 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. The disadvantage is the potential for legal issues in the transfer of ownership if the sole owner dies or become incapacitated.
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. Real property acquired during a common-law marriage will also be deemed to be held as community property.
Community property with the right of survivorship is a way for married couples to hold title to the property. However, it is only available in Arizona, California, Nevada, Texas, and Wisconsin. It allows one spouse’s interest in community-property pass probate-free to the surviving spouse in the event of death.
There are also other ways to hold title. For example, ownership in real property can be held by a corporation. The legal entity is a company owned by shareholders but considered under the law as having an existence separate from those shareholders. One of the main advantages of holding real property in a corporation is liability protection. Similarly, real property 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. There are various types of partnerships that offer liability protection for some or all of the partners. Another popular form of ownership for real property is a limited liability company (LLC) which is a hybrid entity that combines some of the characteristics of a corporation and a partnership.
Finally, real property 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 or a trust, 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”