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There are different forms of real estate ownership that vary according to the number of owners or to some types of property. The form of ownership determines the legal rights and obligations of the owners, and will affect transferability, inheritability, and bankruptcy. The owner may be 1 or more people, or it could be some other legal entity, such as corporation.
Ownership in severalty (aka tenancy in severalty) is when real estate is owned by a single person or legal entity, and provides the owner with the most complete control of the land. The name is derived from the fact that the owner is “severed” from other owners. A sole owner is free to do anything with the property that is within the law—sell it, lease it, gift it, or pass it to heirs without anyone else’s permission.
There are various ways that real estate can be co-owned, which affects the rights and liabilities of the individual owners, but only when the property is conveyed, either through a sale or after death.
A tenancy in common is when the concurrent owners own a fractional interest in the property, which may vary according to owner or, usually, it is divided equally. The title to the real estate will list all of the owners and their share of ownership if it is not equal. If ownership share is not specified, then the ownership is divided equally. For example, if 4 people own a property, then each has a 25% ownership interest in the entire property—the property is not divided in any way. Each co-owner has unity of possession. However, each co-owner can sell, mortgage, or convey his interest—but not the entire property—without the consent of the other co-owners.
When the deed listing concurrent owners does not indicate the form of ownership, and the co-owners are not married, then the form of ownership is as a tenancy in common. If the co-owners are married, then the form of co-ownership can be a tenancy be the entirety, community property in community-property states, or, less commonly, as a joint tenancy.
Joint tenancy is like a tenancy in common, but the main difference is that the joint tenants have an undivided interest with rights of survivorship. An undivided interest is an ownership right to use and possess the entire property. However, no single co-owner can mortgage, sell, or otherwise convey any piece of the land without the consent of all joint tenants. Often, joint tenants are relatives who have received the property from a will.
When a joint tenant dies, the right of survivorship entitles each surviving co-owner to an equal share of the deceased’s share of ownership—thus, each joint tenant maintains an equal share with the surviving joint tenants. However, in some states, the deed must explicitly confer the right of survivorship. The last joint tenant will own the land as a tenant in severalty, and will enjoy all of the rights as a sole owner of property.
A joint tenancy can only be created by intention or by will, not by implication or operation of law. The deed must explicitly stipulate a joint tenancy, and the owners must be explicitly identified as joint tenants.
There are 4 unities that are usually satisfied to create a joint tenancy: unity of possession; unity of interest; unity of time; and unity of title. Corollaries of these requirements of unity are that the title is acquired by 1 deed; the deed is executed and delivered at 1 time; and all tenants acquire an equal and undivided interest in the property. Consequently, in many states, if an owner in severalty wants to create a joint tenancy, the owner must convey the property to an intermediary—a straw man—who then conveys the title to the joint tenants, including the original owner. Some states have eliminated the need for a straw man, so the owner in severalty can convey the property to herself and to others as joint tenants.
A joint tenancy can be terminated when any of the joint tenants convey their ownership interest to another party, who then becomes a tenant in common with the remaining joint tenants, but the original joint tenants retain their rights and interest. A joint tenancy can also be terminated by a partition suit, which is a lawsuit to either partition the property so that 1 or more of the joint tenants has title to a specific portion of the property, or the court can have it sold, with the proceeds of the sale divided equally among the joint tenants.
A tenancy by the entirety is like a joint tenancy, with the tenants having an undivided interest in the property and with rights of survivorship, but differs from it in that there can only be 2 tenants, they must be married, and their ownership interest cannot be conveyed without the consent and signature of both tenants. In many states, if a married couple buys property, and the deed does not stipulate the form of ownership, then a tenancy by the entirety is assumed; in other states, it must be explicitly stated in the deed.
A tenancy by the entirety can be terminated: by the death of a spouse, in which case, the surviving spouse has an ownership in severalty; by divorce, which converts the tenancy by the entirety into a tenancy in common; by agreement of both spouses; or by a court-ordered sale to pay a debt for which both spouses have liability.
Although state laws vary widely, in the 10 states that have community property laws, the property owned by a spouse is classified as either separate property or community property.
Separate property is property owned by 1 spouse, and includes property acquired before marriage, property received from a gift or will, and income earned from separate property. For example, if a wife acquired property before her marriage, and she is currently renting it out, then that income remains separate property.
Community property is any property or income received during marriage that is not separate property.
Oftentimes, land is transferred to a trust for the benefit of minors or incapacitated adults. A trust is a legal device created when a trustor (aka grantor), the creator of the trust, transfers assets to the trust to be invested or handled by a trustee, in whose name the assets are titled, for the benefit of the beneficiaries. The trustee can be a person, but is often a trust company, a corporation that provides this service. The trustee is usually compensated by fee that is paid from the earnings from the trust. After paying expenses for running the trust and the trustee’s fee, the remaining income generated from the assets is usually paid to the beneficiaries.
A trust may exist indefinitely, or may be terminated upon certain conditions, such as when the beneficiaries reach a certain age, in which case, the assets of the trust are passed to the beneficiaries.
A trust can be created while the trustor is alive or through the trustor’s will. A living trust is created during the trustor’s lifetime, and, usually, the trustor is also the trustee, which allows the trustor to continue to control and benefit from the assets. The main purpose of a living trust is to avoid the time and expense of probate. Upon the death of the trustor, the trust’s assets can pass directly to the beneficiaries without the need to have the assets distributed through probate court. A testamentary trust is created by a will.
A land trust has only land for its asset. The land trust usually lasts for a stipulated period of time, after which the land is sold and the proceeds are paid to the beneficiary.
The title to the property is transferred to the trustee usually for the beneficial interest of the trustor when the trustor also names himself the beneficiary. The beneficial interest in the land trust is legally classified as personal property rather than real property, but the beneficiary is still entitled, to control and to possess it, and is entitle to any income or to proceeds of its sale.
There are several benefits to a land trust. Because the deed is in the trustee’s name, the name of the beneficiary does not appear, so the beneficiary can maintain secrecy as to actual ownership. The beneficiary’s benefit can be assigned to someone else without a new deed, and can be used as collateral for a loan, but without a mortgage being recorded. Because the beneficiary’s interest is personal, when the beneficiary dies, the assets of the trust are subject to the laws of the state in which the beneficiary lived, even if the trust had land in multiple states. This avoids probate costs in those other states.
Since corporations are legal persons, they can hold title to real estate just as a real person. Although partnerships are not legal persons, and cannot generally hold title to property in the partnership name, most states have adopted the Uniform Partnership Act (UPA) for general partnerships, and the Uniform Limited Partnership Act (ULPA) for limited partnerships, that allow partnerships to hold title to real estate in the partnership’s name.
A real estate syndicate is 2 or more people or business entities that have pooled their money to invest in real estate. A joint venture is similar except that it is created for a specific business purpose for a definite amount of time. These entities cannot hold title to real estate, except as tenants in common or joint tenants of the individual members of the syndicate or joint venture, or as a trust, partnership, or corporation.
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530 Tax Information for First-Time Homeowners
587 Business Use of Your Home, Publication 587
523 Selling Your Home, Publication 523
527 Residential Rental Property, Including Vacation Homes
521 Moving Expenses, Publication 521
936 Home Mortgage Interest Deduction, Publication 936