There are many ways of taking ownership to real estate. Investors call us when they are selling a property and some question why they took ownership in the manner they did. You do not want to take a chance a title ownership by a flip of a coin.
By Al DiNicola, AIF®, CEPA ™
adinicola@namcoa.com
July 28, 2023
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC
Basically, there are two methods of taking ownership. Specifically, you may own real estate by yourself or with others (concurrent ownership). If you own the property by yourself, it is known as Ownership in or by Severalty. (you may also see a reference to tenancy in severalty). If there is only one owner, the real estate concept is that the owner is “severed” from other owners. When there is only one owner the owner has the most control over the property. When you have an exclusive right to the property, you can do what every you want (depending on local zoning laws).
When two or more people (including entities) own property together at the same time this is concurrent ownership. Concurrent owners may be joint tenants, co-tenants, or co-owners, and they may have different forms of unity, such as unity of person or unity of possession. There may also be written agreements under concurrent owners to establish rights and obligations as well as control.
The two most commonly referenced forms of concurrent ownership would be Tenants in Common or Joint Tenancy.
Most Common may be Tenants in Common
There is a great deal of flexibility in tenants in common ownership. Tenants in common provide for multiple owners as well as different ownership percentages. If there are four owners of a property, owner A may have a 50% ownership. Owners B & C may have 20% ownership each. Owner D may have a 10% ownership. One comment about ownership and tenant. Tenants in common is the type of ownership and not be confused with a tenant renting a property.
There other advantage Tenants in Common may provide is enabling ownership is acquired at different times. Owner/tenant D may have acquired its 10% from Owners B & C who may have each owned 25% originally. Each owner may also have their own title to their percentage of ownership.
Joint Tenancy ~ Benefits and Restrictions
Real estate investors may be seeking additional protections and joint tenancy provides those protections as well as restrictions. Unlike the tenant in common, joint tenants must receive ownership at the same time and equal shares. There are four legs to the joint tenancy structure: ownership obtained at the same time, ownership is in equal interest, same title ownership and equal possession of the property.
If any of the legs are missing the joint tenancy (concurrent ownership) will be in jeopardy. One leg mission then the joint tenancy is gone and now reverts to tenants in common (oh no).
For example, there are four owners (Rebecca, Mary, Susan, and Kim) and all own property as joint tenants and owner Kim sells her ownership to another person (Betsey). Since Owner Betsey obtained ownership at a different time that owner would be a tenant in common.
Rights of ownership are provided in each structure.
However, there are noted differences. One noted difference is the death of an owner with Right to Survivorship
There are a number of questions that come up when any property owner dies and the words right of survivorship may answer those questions. If you own a property and one of the owners die (not, you) then the interests of the deceased owner transfer to the surviving owners. So, if Rebecca, Mary, Susan, and Kim own a property as joint tenancy and Kim dies, Rebecca, Mary, Susan would each own 33.33% of the property. Family members and children of Kim may be concerned about ownership rights and inheritance.
Are there any benefits to the Heirs?
Under the tenants in common ownership there are “no rights to survivorship” provided to the owners of a tenants in common. Heirs of the deceased owner (Kim in the previous example) shall receive interest in the real estate and not the other surviving owners.
It’s Over (Termination)
At some point in time an owner in any type of ownership may be looking for an early exit. If a co-owner in a joint tenancy transfer or sells their interest to another individual the joint tenancy will be terminated. If and when this happens the ownership will revert back to tenants in common structure
There are several situations where a tenant in common may be broken up. These situations may be well planned or strategic (hostile). The owners decide to sell the property, and each receive their share of the proceeds according to their ownership interest. An owner may buy out the percentage of ownership of another co-owner. If one of the owners dies, the heir may solicit or offer the inherited interest to be acquired by another current owner.
What is your preference?
Many single people, families and couples may prefer the tenants in common ownership providing transfer of right to the heirs. If at all costs, you want to avoid going through probate
In any real estate there are times when one owner may be seeking less responsibility of owning the property and consider selling. Upon the sale of any of the properties one or more of the owners (in the ownership forms above) may wish to participate and exercise a 1031 tax deferred exchange. Delaware Statutory Trust (DST) may be a solution to eliminating ownership responsibility and receive passive income as well as all the benefits of real estate ownership. The DSTs option also qualifies for a 1031 exchange, this option of a 1031 and/or DST may become problematic unless proper planning is involved. There are many details on how to property position ownership. Normally the tenants in common provide the easiest solution for a 1031 exchange. However, we would strongly suggest consulting your tax professional if you have an interest in a tenant in common. You may also need to plan for what is known as a “drop and swap”. Basically, dropping your type of ownership and converting to ownership permitting a 1031 exchange.
DSTs are not for all investors.
The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.
This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin -Sherwood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
SOCIAL MEDIA
Social Media platforms are solely for informational purposes. Advisory services are only offered to clients or prospective clients where the advisory firm and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by NAMCOA unless a client service agreement is in place.
Thank you.
