What is ownership interest in a property?
Imagine, for a moment, that you’re the lucky owner of the winning horse at this year’s Kentucky DerbyTM. You’re not the principal owner or sole investor, but as part owner you get to share in the winnings; you own a piece of the action. In this case, “a piece of the action” means a portion of a championship thoroughbred, and your partial ownership is referred to as your “ownership interest.”
The same concept applies in real estate. When you purchase property, such as a home, you don’t just receive the physical property, you're granted a set of rights. Collectively, these rights are known as your ownership interest.
Ownership interest can be total and complete or it can be divided among several individuals or entities. As long as the official paperwork designates you as a person with ownership interest, you retain certain rights to the home and/or property.
Of course, like so much in the real estate sector, things become a bit more complex once ownership interest is extended to partnerships, corporations and trusts. We’ll walk you through the ins and outs of ownership interest, differentiate it from security interest and explain the process of how to transfer your ownership interest.
Ownership interest in a property defined
In real estate, the term "ownership interest" refers to the rights afforded to a single property owner or multiple property owners. These rights generally mean that you are able to use the property as you see fit, within acceptable boundaries. When there are multiple owners, the ownership interest is divided among them based on the amount of individual investment.
We need to be clear that we are not talking about general ownership interest but ownership interest that is specific to real estate. “Real property” is a term that is defined as land and any buildings or structures built on it.
While ownership interest confers certain rights and dispositions upon owners, it also comes with responsibilities, which we’ll touch on here as well. Ownership interest is a subject that can quickly become complicated, one that might benefit from the talents of a real estate attorney.
Ownership interest vs. security interest
One further note on ownership interest: Ownership interest is not the same as security interest (and neither are remotely connected to mortgage interest). Security interest is the right your creditor (a mortgage provider, for example) has to claim your property if you don't pay your loan.
Put another way, if you have entered into a mortgage agreement with a lender, they are the creditor in this relationship and you are the debtor. Since you have borrowed money from them, the house itself is used as collateral and the lender has recourse to possess the property if you default on your payments. That’s the security interest—the right to seize the property if you don’t live up to your financial obligations. By repossessing—or foreclosing on—the property, they actually gain ownership interest. However, this is a fleeting status as the lender’s objective will almost always be to sell the property to pay off the outstanding loan.
Types of ownership interest available In a property
- Sole ownership
- Joint tenancy
- Tenancy by entirety
- Tenancy in common
- Owning trust
- Owning partnership
- Owning corporation
On paper, this may sound self-explanatory—you’re the only buyer so you’re the only owner. True enough: As the sole owner of the real property all ownership rights rest with you. You have total decision-making power and you can do what you want with the property without consulting anyone else or sacrificing your vision (within reason).
Of course, full responsibility for maintenance and upkeep also rests with you. In addition, you’re on the hook for damages related to your property. Let’s say, for example, a lawsuit is filed against you by a tenant who lives on your property and has experienced adverse side effects from something like the presence of toxic radon. If a judge finds you liable, you will be the one paying (minius any insurance you may have procured to protect yourself).
And while those kinds of unpleasant realities are not the norm, there is a more common occurrence that can complicate sole ownership—at least for beneficiaries. If you own a property and have multiple heirs, and these heirs file multiple claims to your property upon death, complications can ensue, leading to a long, dragged out process called probate. Probate can be enormously expensive as well as time consuming.
Joint tenancy is the term we employ when ownership consists of two or more people. This is a typical arrangement for married couples, non-married couples, friends or family members, whereby each party retains equal rights and obligations. Legally speaking, joint tenancy provides clear resolution when one of the owners dies. Creating “rights of survivorship,” the ownership interest of the deceased passes straight to the surviving party or parties, avoiding any potentially contentious or cumbersome proceedings in probate court.
Tenancy by entirety
Tenancy by entirety is frequently employed by married couples with regard to their residential property. It essentially means that each spouse owns the property equally as a single entity. The key provision that separates it from a joint tenancy is the fact that the legal title (which is to say any of the ownership interest) cannot be attached and sold by creditors. This makes it a uniquely appealing asset protection device.
Tenancy by entirety also incorporates rights of survivorship, much like joint tenancy. It can only be dissolved by divorces, spousal death or the mutual agreement of both owners.
One important distinction from joint tenancy is that unanimity in decisions must be achieved before giving away or selling any interest in the property. In plain language, that means no one individual can decide what to do with their specific ownership interest without first receiving permission from the other owner.
Currently, 25 states permit tenancy by entirety.
Tenancy in common
Tenancy in common is a type of legal arrangement whereby two or more owners share ownership interest in real estate property. This affords them equal access to all areas of the property (or home) regardless of their total investment or ownership percentage. Unlike tenancy by entirety, each owner may leave their ownership interest to whomever they delegate without having to reach consensus.
Tenancy in common also has the advantage of being able to be created and modified at any point in time. A property with two joint owners (assuming a tenancy in common) may welcome a third, creating (for example) a 50/25/25 split in ownership interest. Since they do not act as a single entity, each owner is legally clear to make decisions as he or she sees fit.
Of course, one decision that they can’t make on their own is to dissolve the tenancy in common. They also can’t make improvements on their own. For these decisions, tenants must come to a mutual agreement on how to proceed.
If consensus cannot be reached, a judge will order the creation of a “partition by sale,” which forces each tenant to sell their share of the property and eventually split the proceeds according to percentage of ownership share. When property is passed down to multiple heirs and they are unable to work out an amicable decision on what to do, a judge may decide that a partition sale is the best option.
The problem with this sort of partition is that it compels an individual to sell who may not want to sell. That’s why judges prefer to divide the property as a “partition in kind” by ownership percentage and prevent a premature or injurious sale. Owners who wish to sell can sell; owners who wish to keep their share can do so as well. Obviously, this arrangement is more easily realized with a plot of land, for example, than a house, which may prove difficult to divide.
Another designation of ownership interest is called an “owning trust,“ which can be useful for estate planning.
An owning trust is when you (acting as a “grantor”) designate a third property, or a “trustee,” to become the manager of the property while you are still alive. This allows the third-party trustee to manage the property for you but also respond to your directives (if the trust is revocable), including changing provisions or abolishing the trust altogether. Upon your death, the property transfers to the beneficiaries of the trust.
Depending on the specific arrangement, your trust will either be a revocable or irrevocable real estate ownership:
- Revocable trust allows for flexibility. Changes can be made while you, the grantor, are still alive and the assets in the trust are still considered to be owned by you. In addition, a revocable trust can help you avoid probate court. The downside is that your assets are not protected from litigation or state and federal estate taxes at the time of death.
- Irrevocable trust does not allow for any changes to be made once created. The terms and conditions are permanent. In this case, the grantor relinquishes all rights of ownership to the trustee, who can only make changes with the express permission of the trust’s beneficiary(ies).
Limited liability corporations aren’t just for small companies—you can also use one to establish an owning partnership for your property. This is another way to shield your assets from creditors and even provide tax benefits.
In what sounds like a quirky distinction, the individual owner or investor may be liable for taxes on earned income generated through the LLC partnership, but the LLC itself will not be taxed. It may sound complicated and perhaps questionably legal, but the truth is that this is a popular and perfectly legal way to protect your property from creditors and access specific tax benefits.
An owning corporation is a type of ownership interest that allows for corporate involvement in real estate ownership. Typically, a board of directors will oversee the corporation’s ownership interest. While there are invariably many reasons a corporation might want to gain ownership interest in a property, potential liabilities do exist. An owning corporation could be liable for damages and the property seized if the corporation were to be found guilty in a lawsuit and forced to provide monetary compensation to the plaintiff.
What are the rights of ownership?
The rights of ownership are essential to familiarize yourself with if you are thinking about obtaining an ownership interest in a property. While sole ownership entitles you to all rights of ownership, if you are involved in an ownership arrangement with multiple owners, certain rights may be designated to certain individuals. These are often referred to as the “bundle of rights."
Rights of Ownership
- Right of possession: When you purchase a property you have the legal right to own it. While this right can be subject to numerous stipulations such as property taxes, HOA fees and mortgage payments, the bottom line is that if you fulfill the terms of your agreement, you are the owner.
- Right of control: You have the right to use your property as you see fit—make sense, right? You determine what the home looks like, who lives there (including pets) and how to derive income from it. Naturally, this right is not all encompassing. Homeowner associations (if applicable) would have a huge say in your home's appearance. So do zoning laws as well as local, state and federal laws that govern housing and real estate.
- Right of exclusion: This grants the property owner the right to prevent others from trespassing on their home or property. Like the other rights, there are exceptions, including the visitations from law enforcement officers and employees at various utilities.
- Right of enjoyment: This is another way of saying the property owner has the right to enjoy the property as they see fit as long as this enjoyment does not conflict with any laws of HOA stipulations.
- Right of disposition: As the owner, you can sell, transfer or give the property away at a time of your choosing. This includes designating an heir for the property in a will. If there is a mortgage on the property, it cannot be transferred or sold (or given to any beneficiaries) until the lien is paid off. If there are multiple owners, you will have to come to an agreement based on the type of ownership interest you have.
This is not an exhaustive list of every right you are entitled to as a real estate property owner—surface rights, air rights and mineral rights are just a few others worth mentioning quickly—but these are the essential ones you will need to consider when acquiring land or buying a home.
It’s entirely possible that many of these specific types of ownership have only vaguely crossed your mind previously—and that’s perfectly reasonable. After all, when buying a home your first inclination is probably not to dwell on things such as “owning trusts” and “tenancy in common”; you’re more likely to be consumed with “20% down,” “APR” and “closing costs.” First things first, right?
However, there may come a time that having a basic understanding of ownership interest can provide clarity—and fair warning. Most people are familiar with sole ownership and perhaps the parameters of joint partnership, but real estate ownership extends well beyond these two arrangements. Having a cursory knowledge of ownership interest can help you preemptively avoid complications and financial mishaps. If you need assistance finding out more, don’t feel shy about consulting with your lender, title company and a trusted real estate attorney.
Powered by Froala Editor