Property interest (PI), also called ownership interest in a property, is an important concept for investors to understand. You need to know the various types of PI and what each one means. In this article, we cover:
- What is Property Interest?
- Legal Aspects
- What You Need to Know
- Types of Ownership
- Examples of Property Interest
- Commercial, Rental, and Investment Properties
- How Assets America Can Help
- Frequently Asked Questions
What is Property Interest?
Ownership interest in a property refers to the rights in property of individuals and entities. The topic of property interest encompasses ownership percentage, ownership time period, transfer rights, encumbrance rights, and rights of survivorship.
The two major classes of property interest are:
- Legal ownership (LO): The right to legal interest in property, i.e., the person or entity with legal title. A recorder of deeds lists the legal owner on the title deed. The owner controls the property, including its transfer or sale.
- Beneficial ownership (BO): The rights of the person or entity who receives the economic and financial benefits of a property. BO prevails regardless of title entries maintained at the recorder of deeds.
Legal Aspects of Property Interest
Legal ownership gives the titled person or entity the right to control, sell, or transfer a property. The legal owner may be different from the person with a beneficial interest in the property.
Beneficial interest gives you the legal rights to live in a property, collect a share of rental income, and collect a share of sale proceeds.
Frequently, trusts allow separate legal and beneficial owners to share the management of a property. In other words, the party with the title holds the property “on trust” for the benefit of another party. In this case, we call the legal owner the “bare trustee.”
A declaration of trust separates legal ownership from beneficial ownership. The declaration specifies how much BO each tenant in common receives.
Real Property Ownership Law
What You Need to Know
A sole property owner may want to share benefits with a spouse or other person with no legal property interest. Accordingly, the legal owner can give a part of the ownership interest in a property to a beneficiary. Then the beneficiary can receive a share of sale proceeds or rental income.
Types of Ownership
There are several types of ownership interest in a property. They are as follows:
1. Fee Simple
This is outright ownership by one or more parties with all beneficial rights. We also call it freehold and fee simple absolute. Owners have title to the property, including land and improvements. Short of foreclosure or condemnation, the owner of fee simple property cannot lose his property. Fee simple owners have full latitude when deciding how to use the property.
2. Ground Lease
A property owner can sell a ground lease to a lessee in return for compensation and rent. However, the buyer does not own the improved land, but rather has a beneficial interest for a specified period.
When the lease expires, the land and perhaps the improvements revert to the owner. The lease can restrict the maintenance, use, and alteration of the leased premises. Also, the lease can require periodic rent increases.
If you’re interested to learn more, read our Ground Leases – Everything You Need to Know.
3. Life Estates
Life estates are beneficiary tenants that have 100% beneficial interest during their lifetimes or the lifetimes of another party. The property owner grants the life estate to the beneficiary tenant via a deed. Frequently, the grantor and beneficiary are the same person.
After death, the property goes to the “remainder” person, who may be the grantor if different from the beneficiary. We can also refer to life estates as life tenants or tenants for life. Beneficiaries cannot sell life properties during their lifetimes. The life estate ends when the beneficiary dies.
The purpose of a life estate is to pass a property to the remainder person without probate. In other words, the life estate is not part of the tenant’s estate. You can use a life estate when the property’s rental value exceeds a lump-sum inheritance.
The remainder person must agree before the tenant can mortgage or sell the property. Typically, the agreement gives the remainder person a percentage of the proceeds. In fact, that percentage usually increases as the tenant ages.
4. Joint Tenants with Rights of Survivorship
This is a concurrent estate in which all the tenants have equal shares and rights to the entire property. When one tenant dies, the property ownership goes to the survivor, not the survivor’s heirs, and avoids probate.
Frequently, spouses use this method to control the rights of survivorship. In this case, the deed usually specifies the following: “Grantees A and B as joint tenants with rights of survivorship and not as tenants in common.” When the last tenant dies, the property is part of the deceased’s estate. The deceased’s debts attach to the property.
5. Tenants in Common (TIC)
A concurrent estate in which each tenant has rights to a set share of the property. The co-owners may own equal or unequal interests in an undivided property. Co-owners can use a will to specify the transfer to heirs of their property shares after death. For this case, the deed usually specifies the following: “Grantees A and B as tenants in common and not as joint tenants.”
A Tenancy in Common Agreement rather than a deed specifies each co-owner’s usage rights. Typically, TIC co-owners aren’t spouses. A TIC may hold the assets of joint commercial partnership. In all cases, there are no rights of survivorship. When a co-owner dies, the deceased tenant’s property interests go to the named or unnamed heirs.
6. Tenancy by the Entirety (T by E)
T by E property laws regulate how spouses share property ownership. The couple’s ownership receives the same treatment as a single person. Some states include domestic partners in this type of ownership. When one spouse dies, the property “ripens” – i.e., goes to the other spouse without probate.
In some states, tenancy by the entirety is the default for married couples. In other states, a deed must specify this type of tenancy. To sever a tenancy by the entirety, both spouses must agree or must divorce each other.
Creditors cannot foreclose on a T by E property unless both spouses have debt judgments with the same creditor. However, in community property states, creditors can seize T by E property due to either spouse’s debts.
The Four Unities
Common law requires four conditions (“unities”) to establish joint tenants with rights of survivorship or tenants by the entirety:
- Unity of Time: Both tenants must acquire ownership interest at the same time.
- Unity of Title: Co-tenants must share title on the same deed.
- Unity of Interest: Co-tenants share the same interest in the property.
- Unity of Possession: Both co-tenants share possession of the entire property.
If any of these unities break, the property becomes a tenancy in common.
Tenancy by the entirety requires a fifth unity as well:
- Unity of Marriage: Co-tenants must be married. This makes one spouse the property beneficiary of the other spouse. Furthermore, a creditor of just one co-tenant cannot foreclose on the property. Instead, both spouses must share the indebtedness to the creditor.
Example of Property Interest
The joint legal owners can specify a beneficial ownership arrangement. Often, you see this when one party receives a higher percentage of rental income. For example, if Party A has 80% BO, it receives 80% of rental income.
The BO shares of partners has tax implications. You can gain tax efficiencies by transferring BO to the partner in the lower tax bracket.
Commercial, Rental, and Investment Properties
A court can partition commercial, rental, and investment properties, as well as residences, which are TICs or joint tenancies. Specifically, co-tenants can seek division of the entire property instead of selling one co-tenant’s interest.
The court divides the property into separately-owned portions. A “partition by sale” distributes sale proceeds to co-tenants. Tenancy by the entirety is ineligible for property partition.
How Assets America® Can Help
Assets America® can help you purchase or build a property, whatever the form of ownership. We are a high-end, national commercial brokerage firm, arranging loans starting at $10 million. We invite you to contact us for a confidential consultation to discuss your financial requirements.
Frequently Asked Questions
What is real property?
Real property is land and any improvements made upon the land, including buildings and other structures. For example, there are canals, roads, ponds, and machinery attached to the land. All other property is personal property.
What is perfected ownership interest in real property?
Perfect ownership, or perfect title, is an ownership interest in a property through a deed without any defects or liens. Other names for a perfected ownership interest include clear, free, or good title. Perfected ownership facilitates the smooth transfer or sale of a property.
In property ownership, what is a person of interest?
A person of interest is either a titled owner or a person with a beneficiary interest. The type of interest determines a person’s rights and privileges regarding property. There are many forms of ownership arrangements.
How do you determine the ownership interest in a property sale?
Typically, you could check with the recorder of deeds to see what the deed specifies. You may also want to review any Tenancy in Common Agreements or other agreements that affect ownership interests. You also need to check title for any liens or defects.