When two or more people buy a piece of real estate, they will have several options for dividing ownership. The three most common options, particularly for married couples and domestic partners, are:
- Tenancy in Common,
- Joint Tenancy with Right of Survivorship, and
- Tenancy in the Entirety.
Each has its benefits, and no one ownership mechanism will be the best option for every situation. It’s a good idea for home buyers to educate themselves on the advantages (and disadvantages) of each option. And to select the ownership mechanism that best fits their specific needs. This creates a more tailored solution than accepting the default option that lenders or title companies insert into purchase documentation and deeds.
Tenants in Common
When two or more people own property as tenants in common, their relationship is akin to a partnership. As with a partnership, all tenants in common are liable for mortgage, real estate tax, and insurance premiums for the property. No one tenant can claim an ownership interest to any specific portion of the property, but the group owns the total property. Each tenant in common, however, can own a different equity interest in the property. With three tenants in common, for example, one tenant can own a 50 percent interest and the other two can each own a 25 percent interest.
If one tenant in common dies, his or her interest does not automatically transfer to the surviving tenants. Instead, that interest will devolve to the deceased tenant’s heirs as defined by his or her will or by the inheritance laws of the state of residence.
Joint Tenants
Unlike tenancies in common, joint tenancies are deemed to be a single property owner. When one joint tenant dies, the full ownership of the property stays with the joint tenancy. From a technical legal perspective, a joint tenancy requires the title to the property to be formed; and to pass to the owners in one single transaction at the same time. That all joint tenants own equal and undivided shares in the property. Each tenant has a full right of possession to the property.
Tenants in the Entirety
A tenancy in the entirety is a hybrid form of title holding that is limited to married couples. When one spouse dies, the other spouse becomes the sole property owner. Both spouses must agree on a disposition of the property if it is owned in a tenancy by the entirety. A key advantage is that property held cannot be used to settle legal judgments that are levied against only one spouse. This form of ownership is not recognized in every state.
Deciding on Which Form of Ownership is Appropriate for Any Given Situation
Married couples and domestic partners will generally take title to real property as joint tenants; or, if available, as tenants in the entirety. These forms of ownership convey the advantage of survivorship.
Investors and other unrelated property owners might be better served by holding title as tenants in common. This form of ownership is particularly beneficial where multiple owners have different equity interests in the property. Those owners should discuss ownership options with their attorneys, accountants, and insurance agents to determine which option best suits their needs.
Property insurance coverage may be affected by how the owners hold the title. The best homeowners insurance that provides optimum coverage for all owners’ interests may direct owners to take title to real property as tenants in common. Ultimately, the key consideration is that property owners should make an affirmative decision on how to take title to the property, rather than allowing that decision to be made by default.
