How different kinds of title affect real estate sales, taxes, and more
People can own real estate for their primary residence or to hold as an investment rental property, and their ownership is determined through what’s known as a title. There are different kinds of real estate title as well as less common methods of holding title to a real estate property. It’s important to know about these differences so you can decide which method best suits your needs.
- Title refers to a document that lists the legal owner of a piece of property.
- Titles can be issued to depict ownership of both personal and real property.
- The different types of real estate title are joint tenancy, tenancy in common, tenants by entirety, sole ownership, and community property.
- Other, less common types of property ownership are corporate ownership, partnership ownership, and trust ownership.
What Is a Title?
The term title refers to a document that lists the legal owner of a piece of property. Titles can be issued to depict ownership of both personal and real property. Personal property is anything that doesn’t include real estate, such as appliances, vehicles, antiques, or artwork.
Real property, on the other hand, includes the physical property of real estate as well as a bundle of ownership and usage rights. Title for real property must be transferred when the asset is sold, and it must be cleared for transfer to take place.
IMPORTANT NOTE: Clearing a title for real property means determining that it is free of liens or encumbrances that could pose a threat to its ownership.
Real estate ownership can take several forms, with each having implications on ownership transfer, financing, collateralization, and taxing. Each type of title method has its advantages and disadvantages, depending on an individual’s particular situation and how one wants ownership to pass in the event of such things as death, divorce, or sale. The most common of these methods of title holding are:
- Joint tenancy
- Tenancy in common
- Tenants by entirety
- Sole ownership
- Community property
Let’s take a look at what these types of title mean as well as the advantages and disadvantages of each.
Joint tenancy occurs when two or more people hold title to real estate jointly, with equal rights to enjoy the property during their lives. If one of the partners dies, their rights of ownership pass to the surviving tenant(s) through a legal relationship known as a right of survivorship. Tenants can enter into a joint tenancy at the same time. This usually occurs through a deed.
As mentioned above, the main advantage to entering a joint tenancy is that ownership is passed to the surviving tenant if one passes on, avoiding probate even without a will in place. Another benefit is that neither party in the ownership needs to be married or related. If the parties are not married, they can sell the property without a court petition if all parties agree to the division of property. Furthermore, the responsibility for the property is shared between tenants. That means any financial burden relating to the property belongs to everyone, not just one individual.
The downside is that any financing or use of the property for financial gain must be approved by all parties and cannot be transferred by will to an external party after one passes, as it automatically goes to the surviving owner.
Another significant disadvantage is that 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 in order to collect on its judgment. In other words, each of the owners takes a risk in the other’s financial choices.
Tenancy In Common (TIC)
With tenancy in common (TIC), two or more persons hold title to real estate jointly, with equal or unequal percentages of ownership. Sarah, for example, could have a 40% interest in a property while Bob has a 60% interest. At the same time, all aspects of the property are shared by the people named on the title. That means Sarah is not limited to access only 40% of the physical property or only 40% of the time, for instance. Each owner has the right to occupy and use the entire property. The interest percentage simply determines the financial ownership of the real estate.
Unlike joint tenancy, tenants in common hold title individually for their respective portion of the property and can dispose of or encumber it at will. This type of title can be entered into at any time—even years after other owners entered into an agreement. Ownership can be willed to other parties, and in the event of death, ownership will transfer to that owner’s heirs undivided.
Tenancy in common allows one owner to use the wealth created by their portion of the property as collateral for financial transactions, and one owner’s creditors can place liens only against that owner’s portion of the property. This kind of title also makes purchases much easier.
A TIC doesn’t allow for automatic survivor rights. All tenants share the liability for any debts on the property. Joint and several liability may apply for property taxes, for example. That means that each owner is liable up to the full amount due. If one owner is unable to pay their portion, the other owners are liable. Any liens on the property must be cleared in order for a total transfer of ownership to take place.
Tenants by Entirety (TBE)
This method can only be used when owners are legally married. Tenants by entirety (TBE) is ownership in real estate under the assumption that the couple is one person for legal purposes. This method conveys ownership to them as one person, with title transferred to the other in entirety if one of them dies.
The advantage of this method is that no legal action needs to take place at the death of one’s spouse. There is no need for a will, and probate or other legal action isn’t necessary.
Conveyance of the property must be done together and the property cannot be subdivided. In the case of divorce, this type of title automatically converts to a tenancy in common, meaning that one owner can transfer ownership of their respective part of the property to whomever they wish.
Sole ownership can be characterized as ownership by an individual or entity legally capable of holding the title. The most common sole ownership is held by single men and women, and married men or women who hold property apart from their spouse, along with businesses that have a corporate structure allowing them to invest in or hold interest in real estate.
IMPORTANT: When married people wish to own real estate apart from their spouse, title insurance companies typically require the spouse to specifically disclaim or relinquish their right to ownership in the property.
The main advantage of holding the title as a sole owner is the ease with which transactions can be accomplished because no other party needs to be consulted to authorize the transaction.
The obvious disadvantage is the potential for legal issues regarding the transfer of ownership should the sole owner die or become incapacitated. Unless specific legal documentation, such as a will, exists, the transfer of ownership upon death can become very problematic.
Community property is a form of ownership by husband and wife during their marriage that they intend to own together. Under community property, each spouse owns (or owes) everything equally, regardless of who earned or spent the money. Thus, each spouse gets an equal division of real estate property in the event of divorce or death. In the United States, nine states have community property laws: California, Arizona, Nevada, Louisiana, Idaho, New Mexico, Washington, Texas, and Wisconsin. Outside of real estate, personal property acquired during one’s marriage, such as vehicles, furniture, and artwork, may be deemed community property.
Depending on the community property state you reside in, real estate acquired during a common-law marriage may also be held as community property. Texas, for example, is a community property state that also recognizes common-law marriages.
Community property with the right of survivorship
Community property with the right of survivorship is a way for married couples to hold title to property, although it is only available in the states of Arizona, California, Nevada, Texas, and Wisconsin.1 2 3 4 5 It allows one spouse’s interest in community-property assets to pass probate-free to the surviving spouse in the event of death.
Other Ways to Hold Title
Entities other than individuals can hold title to real estate in its entirety:
Ownership in real estate can be done as a corporation, whereby the legal entity is a company owned by shareholders but regarded under the law as having an existence separate from those shareholders.
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. Some partnerships are formed for the express purpose of owning real estate. These partnerships can also be structured as limited partnerships, where investors take limited liability by not making managerial decisions regarding management or transaction decisions. In these cases, one general partner is typically responsible for making all business decisions on behalf of the limited partners.
Real estate also can be owned by a trust. These legal entities own the properties and are managed by a trustee on behalf of the beneficiaries to the trust. There are many advantages and disadvantages to holding real estate that falls outside the scope of this article, but all have to do with benefits surrounding managerial influence and financial and legal liability, in addition to tax and beneficiary considerations.
The Bottom Line
Title to real estate is the method by which ownership is conveyed and transferred during real estate purchases and sales. The methods of owning real estate are determined by state law, so individuals trying to determine the best method to acquire and hold real-property titles should conduct research to determine the unique differences for each method as set out by their state.
For those considering owning real estate through a business entity, such as a corporation, trust, or partnership, it is advisable to consult real estate, legal, and tax professionals to determine which ownership structure is the most beneficial for their particular situation.
In the event of the sole and joint ownership by individuals, prospective owners should consider how their titles should or could be transferred, either by sale or in the event of death, before one method is chosen over another.