Titles differ and affect sales, taxes, and inheritance
Reviewed by Marguerita ChengFact checked by Vikki VelasquezReviewed by Marguerita ChengFact checked by Vikki Velasquez
Real estate is considered real property and bought as a primary residence or an investment rental property. Ownership is determined through a title. Real estate includes land, any structure that sits on it, improvements made to the property, and immovable resources that may appear on that land including vegetation, crops, natural resources, and water.
Real estate can be commercial or residential. Commercial properties include office buildings, warehouses, shopping centers, and retail space. A residential property can be a family home, apartment, or condominium.
Key Takeaways
- A title is 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.
- Real estate titles include joint tenancy, tenancy in common, tenants by entirety, sole ownership, and community property.
What Is a Title?
A title is 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 includes vehicles, antiques, or artwork. Real property means the physical property of the real estate as well as ownership and usage rights.
Titles must be transferred to the new owner when the asset is sold and cleared so transfer can occur. Clearing a title for real property means determining that it is free of liens or encumbrances that could threaten its ownership.
Real estate ownership can take several forms, with implications on ownership transfer, financing, collateralization, and taxing. Each type of title method has advantages and disadvantages, depending on an individual’s situation and how one wants ownership to pass in death, divorce, or sale.
Important
A property lien is a legal claim on assets that allows the holder to access the property if debts are not paid.
1. Joint Tenancy
Joint tenancy occurs when two or more people hold title to real estate, with equal rights to the property. If one partner dies, joint tenancy ensures their ownership rights pass to the surviving tenant(s) through a legal relationship known as a right of survivorship. Joint tenancy can help survivors avoid probate.
Parties do not need to be married or related. Unmarried joint owners can sell the property without a court petition if all parties agree. The responsibility for the property is shared between tenants. All parties must approve financing or using the property for financial gain.
Creditors with 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 to collect. Each of the owners takes a risk in the other’s financial choices.
2. Tenancy In Common (TIC)
With tenancy in common (TIC), two or more persons hold title to real estate, with equal or unequal ownership percentages. Unlike joint tenancy, tenants in common hold title individually for their respective portion of the property and can dispose of it at will. Ownership can be willed to other parties and in death, ownership transfers to that owner’s heirs undivided.
In TIC, one party may own various shares, such as 40% interest and another 60%, but all aspects of the property are shared by the people named on the title. Each owner has the right to occupy and use the entire property. The interest percentage determines the financial ownership of the real estate.
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. All tenants share joint and several liability for property taxes. Each owner is liable for the full amount due.
3. Tenants by Entirety (TBE)
This method can only be used when owners are legally married. Tenants by entirety (TBE) assume that the couple is one person for legal purposes. This method conveys ownership to them as one person, with the title transferred to the other if one dies.
The advantage of TBE is that no legal action needs to take place at the death of one’s spouse. There is no need for a will or probate. 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, so one owner can transfer ownership of their respective part of the property to whomever they wish.
Note
When married people want 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.
4. Sole Ownership
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 one single individual, one married person who holds property apart from their spouse, or businesses with a corporate structure allowing them to invest in real estate.
Sole ownership means transactions can be accomplished because no other party needs to be consulted to authorize the transaction. Legal issues may arise during the transfer of ownership should the sole owner die or become incapacitated and the sole owner’s wishes should be clearly defined in a will.
5. Community Property
Under community property laws, any assets acquired during a marriage are jointly owned between spouses. Assets acquired by one partner before marriage belong to that individual only. Community property ensures that everything is equally owned, regardless of who earned or spent the money. 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 a marriage, such as vehicles, furniture, and artwork, may be deemed community property.
Depending on the state, real estate acquired during a common-law marriage may also be community property. For example, Texas is a community property state that recognizes common-law marriages.
Warning
Community property with the “right of survivorship” is only available in Alaska, Arizona, California, Nevada, Texas, and Wisconsin. This overrides the division of assets at death and allows one spouse’s interest in community property assets to pass probate-free to the surviving spouse in the event of death.
Additional Titles
- Corporate Ownership: A corporation can own real estate, whereby the legal entity is a company owned by shareholders but regarded under the law as having an existence separate from those shareholders.
- Partnership: A partnership is an association of two or more people who 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.
- Trust: Real estate can be owned by a trust. These legal entities own the properties and are managed by a trustee on behalf of the trust’s beneficiaries.
What Is a Drawback of Tenancy in Common?
Tenants in common have equal rights to use the property, regardless of their ownership percentage. Responsibilities are also divided evenly. This can lead to issues when a minority owner misuses the property.
Does Community Property Include Debts?
Yes, community property includes debts. This means that creditors of spouses may be entitled to claim a community property estate.
How Long Does a Real Estate Trust Last?
Real estate trusts last for a set period, that can be extended by the beneficiary when it expires. Otherwise, the property will be sold.
The Bottom Line
Title to real estate is how ownership is conveyed and transferred during real estate purchases and sales. The methods of owning real estate are determined by state law. 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 beneficial.
Read the original article on Investopedia.