When someone owns a piece of real estate, they hold the title to that property. The word "title" refers to the document that shows the legal owners and the legal description of the property. The word "tenancy" refers to how title is held and the property's intended use. There are different methods of holding title, or tenancy, depending on the property and its intended use. The main types of tenancy in real estate are joint tenancy, tenancy in common, tenants by entirety, sole ownership, and community property. The different forms of tenancy affect how the property can be financed or used as collateral as well as how ownership is transferred and the tax requirements associated with the property.
Joint Tenancy
Joint tenancy refers to when two or more people collectively own real estate, and each party has equal rights to the property. The primary advantage to joint tenancy is that if one party dies, their right of ownership transfers to the other owners through what is known as a "right of survivorship." Additionally, parties can enter into a joint tenancy without having to be married or have some other type of legal relationship. Also, the financial responsibilities for the property are shared equally between all owners.
There are a few disadvantages to joint tenancy, as well. The primary downside is that any financing of the property or changes to the specific use of the property with regards to financial gain must be agreed upon by all parties. In addition, ownership in the property cannot be transferred to heirs or others via will. Instead, the deceased's share of ownership is automatically transferred to the surviving owners.
Tenancy in Common
Tenancy in common is a type of ownership where two or more people own the property, but their share of ownership is not equal. For example, one person might own 50 percent of the property while two other people each own 25 percent. This division of ownership does not refer to the use or enjoyment of the property. All owners have equal access and use. Only the financial ownership is divided.
A key difference between tenancy in common and joint tenancy is that each owner with tenancy in common can encumber or dispose of their share of the ownership at will, meaning they can borrow against their share of the property, sell their share, or transfer ownership to heirs via a will without the consent of the other owners.
The main advantage to tenancy in common is that each owner holds individual financial ownership and obligations with regards to the property. Creditors cannot place liens against the property as a whole, for example, which protects each owner's interest against another owner's financial obligations and debts.
Disadvantages to this type of ownership include the financial obligation of all parties to debts against the property as a whole, such as tax obligations. If one owner cannot pay their share, the debt falls to the other owners to cover it. Additionally, tenancy in common ownership does not give automatic survivorship rights to the remaining owners.
Tenancy by Entirety
Tenancy by entirety is a type of ownership that is reserved only for legally married couples. This type of tenancy considers the owners to be a single entity for legal purposes. If one person dies, the title is transferred to the remaining spouse. The advantage to this type of ownership is that no legal action is necessary upon the death of one spouse. Transfer of title is automatic. On the other hand, the property cannot be sold or transferred without the consent of both spouses. In the case of a divorce, the ownership of the property converts to tenancy in common instead.
Sole Ownership
Sole ownership occurs when the owner of a property is a single person or business that can legally hold the title alone. This type of ownership allows for a great deal of freedom with regards to decisions about the property. Sole owners can finance or encumber the property as they see fit and can also dispose of the property at will.
On the other hand, sole owners are also entirely responsible for the property, including any liens or tax burdens associated with it. Additionally, property under sole ownership has not automatic transfer upon the death of the owner. Transfer of ownership is reliant upon a will or other legal documentation. A death without a will can legally tie the property up in probate for some time.
Community Property
Community property is a type of ownership between married spouses where each person owns an equal share of the property. This differs from tenancy by entirety in that the spouses are not considered a single legal entity in a community property tenancy.
Under a community property tenancy, both spouses have equal rights to ownership as well as equal responsibility for any liens or debts against the property. There are nine states that have community property laws, including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
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