Homebuyers spend a lot of time trying to buy the right home and getting the right mortgage but many fail to understand the type of real estate ownership they will use to register title on the property.
Title = ownership.
There are two ways in which you can own property, by yourself (severalty ownership), or with someone else (concurrent state).
The type of real estate ownership you choose will determine who legally owns the property. This is super important, particularly for when you sell the property, in case of a divorce, or if an owner dies.
Forms of Real Estate Ownership
1. Severalty Ownership (one owner)
Severalty means separate, severed, or alone; thus, ownership in severalty is when there is ONE owner on the deed; this can be a person or an entity such as a corporation.
So when a single person buys a property in severalty, the person has the right to do whatever he/she wants with the property such as mortgage it, or sell it without permission from other parties.
2. Concurrent State (more than one owner)
A concurrent estate describes the various ways in which property can be owned by more than one person or entity at a time; hence why it is called concurrent. The three types of concurrent ownership are:
Tenancy in Common
Each type of ownership has different pros and cons which depend on the buyers’ specific circumstances. Let’s take a look at what those are:
Tenancy in Common
Tenancy in common is a type of real estate ownership that allows one to own property in unequal shares; thus, it has become a popular way for people to pool resources to purchase a property. For example, two buyers can own a property 50/50, 70/30, or through any other combination, they can agree to.
Each owner has an undivided interest in the property, which means they have the right to occupy the whole property without the need to allocate different areas of the home.
A tenant in common also has the right to mortgage, sell, gift, or transfer their interest in the property to anyone they choose without the consent from other concurrent owners. And if one of the tenants in common dies, his or her interest in the property does not automatically transfer to the other tenant in common. Instead, it goes to his or her heirs, or as directed on a will.
Consider this example:
John and Mike purchased a property for $600,000 as tenants in common; they registered title for 50% ownership each. Through the years, John paid $400,000 while Mike only paid $200,000.
If they decide to sell the property, it may seem as if John should get more money than Mike, but what matters is what is registered on the title. So, John and Mike would each receive a 50% share.
Now, what do I mean when I say each owner has an undivided interest in the property?
Let’s assume the property John and Mike bought is a two-storied home with four bedrooms, two washrooms, and a kitchen. Since they each own 50%, does that mean John and Mike own two bedrooms, and one washroom, plus half the kitchen each?
No, because they each own an undivided share of the whole property.
The key difference between tenancy in common and joint tenancy is that with a joint tenancy individual owners cannot sell, mortgage, transfer, or gift their share of the property to anyone without the consent of the other co-owner(s).
Also, joint tenants have rights of survivorship, which means if one of the owners dies, the surviving tenants inherit the share of the deceased regardless of what the will might say. This is often referred to as tenancy in entirety.
Married couples typically buy their properties as joint tenants; this way, each owner is entitled to an equal share of the home regardless of how much money they each spent on the property. If things change at a later stage such as a separation, you could always update the type of real estate ownership from joint tenancy to tenancy in common or vice versa.
For a joint tenancy to exist each owner must acquire an equal share of the property, with the same document of ownership, and at the same time.
Four unities of joint tenancy:
If any of those unities is broken, the concurrent form of ownership is no longer joint tenancy, but tenancy in common. Here is an example:
Jim, Mark, and Tony bought a property as joint tenants. However, a few years later Tony decided to move out so he sold his share to Mike. Because Mike did not buy his share at the same time as Jim, and Mark, he cannot enter the concurrent ownership as a joint tenant. He is a tenant in common.
Community property is any property acquired during marriage; as such, it is part of the “community” of the marriage. Think about “community” as husband and wife. Each spouse owns an equal share, regardless of whose name is on the title.
This type of real estate ownership allows each owner to transfer, or bequest their asset to a designated heir upon death, but not while alive and married.
For example, if George, a remarried man, wants to bequest his share of a community-estate (upon his death) to his ex-wife and children from his previous marriage, he can do that given that George lives in a state where community-estate is a legal form of real estate ownership.
However, if George wanted to transfer his share of the state while still alive, he’d need consent from his current wife.
The states where community property law applies are California, Washington, Wisconsin, Idaho, Texas, Arizona, New Mexico, Louisiana, Nevada, and Alaska.
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Changing your type of real estate ownership
You can change your form of real estate ownership from either:
Tenants in common to joint tenants: for instance, if you get married and want to add your spouse with equal ownership.
Joint tenants to tenants in common: for instance, if you divorce or if you separate from your spouse.
What Percentage of Ownership Does Each Owner have?
With joint tenancy and community property, by default, each owner gets an equal share. However, with tenancy in common, the share of ownership will depend on whatever the buyers agree to.
Tenancy in Common vs. Joint Tenancy
Tenancy in common and joint tenancy are both common types of real estate ownership in the marketplace. Although they both allow two or more parties to own property, there are a few very important differences.
While tenancy in common allows an owner to mortgage, sell, transfer, or gift their share of the property to anyone they choose, with joint tenancy you need approval from the co-owner(s).
The biggest difference is the right of survivorship. With joint tenancy, if an owner dies, his or her share of the property goes to the remaining owner(s) whereas, with tenants in common, the property goes to the heirs or as directed on a will.
What Is the Type of Ownership of the matrimonial home?
Married couples and common-law partners typically own the matrimonial home as joint tenants. Even if there is only one name on the title, the property is legally owned by both spouses; thus to get a mortgage, or sell the property both spouses need to consent to it.
Some homebuyers add a child or a third party when buying their home, but doing this is risky especially when that child later gets married.
Here is an anecdote:
Back in 2008, my parents wanted to buy a home but because their credit wasn’t great they asked for my help. The mortgage agent at the time recommended I add my 18-year old brother on the title so that we could improve the chances of getting a mortgage approval. I agreed.
Fast forward 10 years later, my younger brother got married, and my parents decided to sell the property, my younger brother’s wife claimed a portion of the property and succeeded!
If you’re buying a property as are adding a brother, child, or any third party as a joint tenant or tenant in common, make sure to discuss with your lawyer so that you can plan for future eventualities that may come your way down the road.
Ownership of Additional Properties
Tenancy in common is the best form of real estate ownership for investment properties, particularly if you’re acquiring the property together non-relatives. You’ll need to clearly define who pays what, but tenancy in common gives you more flexibility to do what you want with your share of the property.
Real Estate Ownership by Business Entities
The biggest benefit of owning real estate through a business entity is that the real owners may have limited liability should anything go wrong with the investment. The most common types of businesses used to hold property are a corporation or a limited partnership.
Note, that even though multiple owners can own a business, the property is owned by the business, so there is one owner. Thus, the applicable form of ownership is tenancy in severalty. If multiple businesses own a specific property, the applicable form of real estate ownership becomes tenants in common.
To put this into perspective, let’s say that Joe and Shawn decided to put together their money to buy a house as an investment. Joe and Shawn will own a 50% share each, so they formed a limited partnership.
When the property is bought, the name on the deed will be the name of the business even though Joe and Shawn own the business.
Transferring Real Estate Ownership to a Trust Entity
Many parents and grandparents form trusts, either while alive or through a will so they can transfer assets to a beneficiary (usually a minor child). The trust can be administered by a trustee until the child reaches adulthood, or for a defined period.
In this case, a testamentary trust is an alternative vs. directly distributing the assets right away. The grantor can control the timing of when the asset will be distributed and in some cases trusts help you avoid having assets taxed multiple times if an estate passes through more than one generation.
For example, a grandparent can create a trust so that their real estate asset go to grandchildren instead of to their children. That way the grandparents can avoid having the assets twice as the estate is transferred from one generation to the next.
Is It Better to Own Real Estate Personally or Through a Company?
It’d be great if there was a straightforward answer to this question, but the truth is that it depends on your specific goals and situation.
Benefits of owning real estate assets through a corporation
Generally, companies such as corporations have lower tax rates than individual tax rates, so you can defer the total tax impact when owing property through a corporation.
For instance, corporations pay a tax rate that’s no higher than 27%, but individuals’ marginal tax rate can be over 50%. As long as you keep the profits in the corporation you can defer personal taxes until you take out a dividend.
This can be an effective strategy for investors that don’t need the monthly income but want to use the tax savings to expedite paying down the mortgage. However, if you’re planning to use the profits pay yourself out the profits from the corporation, then it’s
Drawbacks of owning real estate assets through a corporation
Lenders generally prefer lending to individuals than corporations, particularly if we’re talking about modest property investments.
To lend money to a corporation a lender will require financial statements, income projections, and most likely would require the owners to guarantee the loan personally anyway.
Thus, unless you have a well-established company it will be more challenging getting lenders to approve a loan.
Do you own a property and know what type of ownership it is under?
Many homebuyers do not understand the importance of the different types of real estate ownership until it is too late. Family disagreements happen, people get divorced, family members get married.
These are all actions that can change the legal fabric of who really owns a property regardless of who is registered on the title.
Before signing on the dotted line, speak with a lawyer so that you can make a conscious decision, and choose the type of real estate ownership that’s right for you.
If you’re thinking about buying a home, taking a home buyers course can help you get ready by understanding what to expect at each step of the process. Our Home Buyer’s Online course is a great resource that will help you get the home you want, in the neighborhood you want, and for a price you can afford.