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Form of Ownership Governs Property Rights

Filed under Personal Finances. Fact checked on May 24, 2012.

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The way in which you own property determines your rights in the property and your rights to dispose of that property. Learn the keys to passing property to heirs and other secrets of property ownership.

When you own property, you have the exclusive rights to possess and control the property, to use the property for pleasure or for profit. You have the right to dispose of the property during your lifetime by contract, deed, grant, lease or gift. Depending upon the form of ownership, you may have the right to dispose of it at death. You also have the responsibility for all expenses and other charges in connection with the property.

When one person owns the property, all of these rights and responsibilities are vested in that individual. When two or more persons own the property, there must be some method of allocating the rights and responsibilities between the various co-owners. The rules governing the rights and duties of property co-owners are determined by state laws and, therefore, are somewhat different in each state.

Most states follow laws handed down from the old English common law system, and continue to use the old terminology, such as "tenant" meaning owner and "tenancy" meaning ownership. In addition, a few states have borrowed from the civil law traditions of Spain and France and have adopted a system of "community property" or "marital property" to define the property rights of husband and wife.

The law of the state in which the property is located usually prevails. For example, if a person who resides in Illinois owns a parcel of property located in Alabama, the law of Alabama will determine the ownership rights and the form and content of the various legal documents and procedures involved in the selling, leasing, financing, inheritance, bequest or devise of the property.

The most common forms of co-ownership include:

  • tenancy in common is used when property is held by two or more persons and, upon death, each owner's interest passes to his heirs or devisees
  • joint tenancy with right of survivorship is used when property is held by two or more persons and, upon death, each owner's interest automatically passes to the other co-owners
  • tenancy by the entirety is a type of joint tenancy that applies only to husband and wife during the marriage
  • community property is statutorily created joint ownership that applies only to husband and wife who reside or own property in a state that has enacted the community/marital property laws

Tenancy in Common Provides No Right of Survivorship

In "tenancy in common" two or more persons are entitled to the possession and use of the same property, but do not automatically inherit the co-owner's interest. The owners may own unequal interests (shares) and may have received their interests at different times and through different means (grant, deed, inheritance, etc.). 

The important distinction between tenancy in common and other types of co-ownership is that, upon death, each owner's interest passes to his heirs or those named in his will. There is no right of survivorship which transfers the decedent's interest to the other co-owners.

Survivorship Rights

This right to specify who shall receive your property at your death is considered so important that, under the law, tenancy in common is preferred over other forms of co-ownership. That is, if property is transferred to two or more persons and nothing is said about how the property is to be held, it is generally assumed to be held as a tenancy in common.

Ownership Rights

Each common owner may enter on the common property, take possession of the whole, occupy and utilize every portion of the property at all times and in all circumstances. The rights to use and possession, however, are not exclusive, and each common owner has the same rights. If income is derived from the property, each co-owner is entitled to his proportionate share of the income.

Ownership Responsibilities

Each co-owner is also responsible for his proportionate share of expenses, taxes, and repairs. If the expenses are paid by one co-owner, the other co-owners must reimburse him for their share, or their duty to reimburse may be enforced by a lien against their interest in the property. If one co-owner pays for improvements to the property, the other co-owners must reimburse only for the lesser of the cost of the improvements or the increase in value of the common property.

Example

Adam adds a garage onto a home that is held in equal shares by Adam, Bill and Chuck. The cost of the garage is $21,000, but it increases the value of the property by only $15,000. Adam can recover only $5,000, not $7,000, from each of the other co-owners, Bill and Chuck.

Conveyance

Each co-owner has the right to transfer or convey his interest in the property (but not the property itself) by selling it, giving it away, or transferring it to persons of his choice at death, without the consent of the other co-owners. In addition, the debts of each common owner will bind his interest in the property, but will not affect the common property or the shares held by the other co-owners.

Partition

If tenants in common wish to terminate their shared ownership of the property they may voluntarily, by written agreement, divide the property into separate ownerships, or any co-owner may file a court action for partition. The court may either divide the property into parcels according to each owner's share, or it may sell the property and apportion the proceeds among the co-owners.

Example

Alice dies owning a tract of land improved with a single-family dwelling, leaving no spouse and having no will. She does leave a daughter Betty, and two grandchildren, Dick and Jane, who are the children of a deceased son. Betty inherits a one-half interest and Dick and Jane each inherit a one-fourth interest in the property.

Betty files a partition suit against Dick and Jane. The court determines that the property cannot be divided among the three tenants in common, so it orders the property sold at public auction. The proceeds from the sale are $120,000. Betty receives $60,000 and Dick and Jane each receive $30,000.

Joint Tenancy Has Right of Survivorship

Joint tenants own equal shares of the property and each one has the right to possess the property. When a joint tenant dies, the other joint tenants automatically inherit the property. Not every deed that describes the co-owners as joint tenants is sufficient to create a joint tenancy. In order to create a joint tenancy, the document should state:

To A and B, as joint tenants with right of survivorship, not as tenants in common, tenants by the entirety, or community property.

On bank accounts or other types of investments co-owned by two people, you may see the abbreviation "JTWROS." That means that the bank or other institution is treating the ownership as a joint tenancy. Without this, or similar language, the law assumes a tenancy in common is created.

Meeting Necessary Conditions

Traditionally, the joint tenants must receive their interest at the same time and through the same document (for example, a deed or will). However, with assets such as bank or investment accounts, you can usually change an existing ownership arrangement to a joint tenancy by simply notifying the institution that you want to change the names on the account. Be aware that the IRS may treat this as a taxable gift.

In addition, each joint tenant's interest must be equal in amount, (e.g. one-half interest for two joint tenants, one-third interest for three joint tenants, one-fourth interest for four joint tenants, etc.) and equal in equal in nature (e.g. fee simple or a life estate)

Ownership Rights

Each joint tenant has an equal, undivided interest in the whole property. As with tenancy in common, each joint tenant may enter onto the common property, take possession of the whole, occupy and utilize every portion of the property at all times and in all circumstances. But, the rights to use and possession are not exclusive; the same rights are shared by each joint tenant. If income is derived from the property, each joint tenant is entitled to her proportionate share of the income.

Ownership Responsibilities

Each joint tenant is also responsible for her proportionate share of expenses, taxes, and repairs. If the expenses are paid by one joint tenant, the other joint tenants must reimburse her for their share. The duty to reimburse may be enforced by one joint tenant by placing a lien against the interests of the other joint tenants. If one joint tenant pays for improvements to the property, the other joint tenants must reimburse only for the lesser of the cost of the improvements or the increase in value of the common property.

Survivorship Rights

On the death of one of the joint tenants, the interest of the deceased passes automatically to the surviving joint owners, not to the heirs of the deceased or the persons named in his or her will. The right of survivorship continues until the sole survivor of the joint tenants owns the entire interest in the property.

Severance

There is nothing sacred about a joint tenancy. It may be broken by any of the joint tenants. Certain actions will break it, even against the wishes of the other joint tenants, and convert it into a tenancy in common, so that the survivorship feature will not take effect.

  • A transfer, or even a contract to transfer, by a joint tenant to a third party destroys a joint tenancy, at least with respect to the person who transfers the interest in the joint tenancy.
  • An involuntary transfer of title will sever a joint tenancy. For example, a creditor of one of the joint tenants can reach only that tenant's share.
  • In some states, a mortgage executed by one of the joint tenants severs the joint tenancy, but a mortgage executed by all of the joint tenants does not.
  • If one joint tenant files a partition suit against the others, and the partition is granted, the joint tenancy is severed.
  • Any agreement among the joint tenants showing an intention to treat the property as a tenancy in common will cause a severance.

Disadvantages

Joint ownership with the right of survivorship may seem convenient and easy, but it can have disadvantages.

  • A family could be disinherited.
Example

Two brothers, Tim and Jake, own property as joint tenants with right of survivorship. Upon the death of one, the survivor automatically received the decedent's interest. If Tim dies, Jake receives Tim's interest. Tim's wife and children do not inherit, even if Tim left a will stating his property was to go to his wife and children.

  • A parent could lose control over property owned jointly with children.
Example

Mable, a widow, owns her home outright. Thinking that she would save probate costs upon her death, she placed the property in joint tenancy with her daughter, Patsy. Now, Mable wants to remarry, sell the home, and move to Florida. Patsy, not wanting her mother to remarry and move away, refuses to sell.

  • Including only one child's name on a property deed could cause hard feelings and disinherit other children.
Example

Mrs. Smith placed the title to her farm in joint tenancy with her son Robert. She told Robert to share the property with his sister, Ruth. After their mother died, Robert refused to share the property with Ruth. Legally, he is not required to do so.

Married Couples Have Additional Property Ownership Options

Tenancy by the entirety is a form of co-ownership that applies only to a husband and wife while they are married. It is based on the old common law view that a husband and wife are one person for purposes of owning property. 

As long as they are still married, neither the husband nor the wife separately have an interest that can be sold, leased, mortgaged or liened against. Nor can the property be partitioned or divided between them. Each spouse has an undivided interest in the whole property and the right to sole ownership when the other spouse dies. It is therefore necessary that any document relating to property held in a tenancy by the entirety be signed by both husband and wife.

Example

Rick and Jane hold property in a tenancy by the entirety. Rick makes a deed that purports to transfer his interest in the property to Todd. Jane does not join in this deed. Thereafter, Rick dies. Jane now has full title to the property. Todd has nothing.

Only about one-half of the states continue to recognize tenancy by the entirety--and some recognize this form of ownership only for real property.

Alaska Arkansas Delaware District of Columbia Florida
Hawaii Illinois* Indiana* Kentucky* Maryland
Massachusetts Michigan* Mississippi Missouri New Jersey
New York* North Carolina* Oklahoma Oregon* Pennsylvania
Rhode Island Tennessee Vermont Virginia Wyoming

* Recognized for real property only

In those states that recognize tenancy by the entirety, generally any conveyance of property to a husband and wife will create a tenancy by the entirety, unless the deed or will specifically states otherwise. In states where it is not recognized, a conveyance specifying a tenancy by the entirety will create a joint tenancy with right of survivorship.

Because tenancy by the entirety is applicable only to a husband and wife during a valid marriage, if they divorce, the tenancy by the entirety is automatically converted into a tenancy in common with each person owning a one-half interest in the property. However, there are a few states that convert it to a joint tenancy with right of survivorship.

State Law Creates Community Property Ownership

Community property, also called marital property, is recognized in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, but the laws vary from state to state. In these states, property is generally divided into two categories: separate property and community (marital) property. Be aware that if you have ever lived in one of these states while married, property that became "community property" in that state retains that character even if you move to a non-community state.

Separate Property

Property that was owned by either spouse before marriage or was acquired by one spouse after marriage as a gift, inheritance, bequest or devise is considered to be separate property. Income from separate property is also considered separate property, as is property acquired during the marriage with funds derived from the separate property. However, if separate property is commingled with community property so as to make it impossible to identify, the separate property is presumed to be community property.

Warning

If you have ever lived in a community property state, it is important to keep complete and accurate records of how separate property was obtained and used to overcome the presumption that it is community property.

Community Property

All property owned or acquired by a married person is considered to be community property unless the person can prove that it is separate property. Each spouse owns one-half of the property and has an equal right of management and control of the community property, but neither spouse may enter into any form of agreement to buy, sell, or mortgage the property without the other spouse's consent. Community property cannot be used to satisfy a separate debt of either spouse.

Upon divorce, community property is divided equally and is deemed to be owned by husband and wife as tenants in common. If one spouse dies leaving a will, his or her share of the community property will go to the persons named in the will. Who inherits community property when there is no will varies from state to state. In some states, the surviving spouse inherits the property, and in other states the decedent's share goes to his or her descendants.

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