Types of Property Ownership
I’m in the midst of the Estate Planning module in my financial planning curriculum and we are currently studying types of property ownership. Since this is an important piece (although often overlooked) of buying and holding real estate I thought I would provide a quick run down of the various types. I need to warn you that I am not a lawyer and am not licensed to practice law so seek qualified legal counsel if you are wondering how this applies to you.
*Fee Simple Ownership: This type of ownership implies complete ownership of property by one individual who possesses all right associated with ownership of the property, including right to use, sell, gift, alienate, convey, or bequeath the property. Upon death the property will transfer via the decedent’s estate via will or probate.
*Tenancy in Common: This is ownership held between two or more related or unrelated parties that can be of equal or unequal proportions (i.e. 50%/50% or 25%/75%). Each parties ownership is undividable but may be conveyed without consent of other interested parties. Upon death of an owner usually 100% of the value of their fractional ownership is included in their estate and transferred via probate or will.
*Joint Tenancy: This form of ownership is similar to Tenancy in Common in that it is held by two or more related or unrelated parties, is undividable, and may be transferred freely without consent of other joint owners. However, under Joint Tenancy their is usually an automatic transfer of interest to the surviving tenants upon death. Therefore, it is commonly referred to as Joint Tenancy with Rights of Survivorship or “JTWROS”. The value to be included in the decadents estate is based on the current fair market value but is pro-rated based on the original contribution the decedent made to acquire the property. This form is often used between related parties.
*Tenancy by the Entirety: This form of ownership may only occur between two spouses and is similar to JTWROS. The difference with this form of ownership is that one spouse’s ownership interest may not be transferred without the joint spouse’s consent. Upon death of one spouse 50% of the fair market value of the property is transferred to the spouse automatically. The surviving spouse retains their adjusted basis on their 50% ownership interest regardless of contribution when the property was acquired.
*Community Property: This is a statutory regime in which married individuals own an equal undivided interest in all property accumulated during their marriage. Property acquired before the marriage union and/ or inherited by one spouse is not considered community property. Community property cannot be transferred without consent from both spouses. Upon death community property is not automatically transferred to the surviving spouse because it is transferred through will or probate. Community property has special “stepped up basis” rules in which the surviving spouse receives a “stepped up basis” for their 50% ownership interest AND the inherited 50% interest. The community property statutory regime only applies to Louisiana, Texas, New Mexico, Arizona, California, Idaho, Washington, and Wisconsin.