There are four main ways to hold title to real estate: solely, as a tenant in common, as a joint tenant with right of survivorship and as a tenant by the entirety.
Each has very different rights, obligations and protections. Knowing the best way to hold title can save you major headaches.
Sole ownership: This is most fundamental way to own real property. When an individual owns property in his name solely, he has all rights and obligations of an owner. Those rights include: right to occupy and peaceably use the property, right to lease it out, to convey, to sell, to pledge, encumber and devise the property in his will as he sees fit.
The sole owner’s obligations include: paying property taxes and ensuring that no nuisances emanate from his land that adversely effect his neighbors.
A sole owner’s real property is not protected from his creditors. If his creditor obtains a judgment against him, his property is at risk of being attached and sold. Once a judgment is obtained against a sole owner, depending on the jurisdiction, it may automatically become a lien against all real property he owns in that jurisdiction.
In other jurisdictions, such as the District , the judgment creditor must record that judgment in the office of the recorder of deeds for the lien to take effect. But once the lien has been attached, the judgment creditor may seek to have the sole owner’s real property sold at a sheriff’s sale and have the net sale proceeds used to satisfy that judgment. For this reason, an individual may wish to consider forming a limited-liability entity, such as a limited-liability company or corporation, to hold title to his real property.
Tenancy in common: This allows two or more owners to hold title. It is most commonly used in a business-like purchase in which two or more people buy investment property together.
Tenancies in common are also appropriate when an unmarried couple buys a house together and both want to be able to devise their interest in their will, perhaps to children from prior marriages or other reasons. Each tenant in common can own a different percentage in the property. This percentage should be stated in the deed.
Subject to his co-owners’ rights, a tenant in common has essentially all the same rights as a sole owner, including the right to devise his interest in his will. Thus, although a co-owner can theoretically use, occupy, sell, lease or mortgage his interest in the real property, practically speaking, it may be difficult to find a buyer, lender or tenant for his portion of the property.
A judgment creditor’s lien against one co-tenant only attaches to that co-tenant’s interest. But that judgment creditor can force the sale of that co-owner’s interest in the property.
Other problems also often arise internally, when two or more owners have differences of opinion regarding the property’s use, operation, financing, management or disposition. If those differences cannot be amicably resolved, the only recourse may be to file a lawsuit. That lawsuit can be for declaratory judgment or partition.
A declaratory judgment lawsuit asks the judge to decide each co-tenant’s rights. A partition lawsuit seeks to have the property sold and the net proceeds distributed to each co-owner in accordance with their percentage interest. These lawsuits are risky, time-consuming and expensive. They require lawyers, appraisers, real estate agents, expert witnesses and, of course, a buyer. These lawsuits often can be avoided with a little advance planning. Co-owners should take the time to sign a written co-tenancy agreement that addresses these dilemmas.
Joint tenancy with rights of survivorship: This is another way for two or more persons to hold title. Its one main difference, as its name implies, is that when a joint tenant dies, the surviving joint tenant acquires his interest. So, for example, if five siblings inherit their parent’s home as joint tenants with rights of survivorship, each child owns a 20-percent interest. If one sibling dies, the remaining siblings will then each own a 25-percent interest. At some point, the last survivor becomes the sole owner.
Joint tenant rights and obligations are similar to tenants in common, except that, a joint tenant’s interest cannot be devised by a will. A joint tenant’s judgment creditor can only attach that joint tenant’s interest. But that judgment creditor can force the sale of that joint tenant’s portion of the property. If that happens, the joint tenancy is deemed severed, and the remaining co-owners find themselves as tenants in common.
Tenancy by the entirety: This is reserved exclusively for real-property ownership by married couples, or, where applicable, domestic partners. Over many years, the law created this fictionalized entity called the “entirety.” Each spouse is deemed to own 100 percent of the entirety, subject only to his spouse’s ownership of 100 percent of the entirety.
The tenancy by the entirety has all of the beneficial attributes of sole ownership. The entirety can use, occupy, sell, lease, mortgage or encumber the property. However, one spouse cannot act unilaterally. The entirety also has the attribute of survivorship. When one spouse dies, the surviving spouse automatically becomes the sole owner. If the parties divorce, the tenancy by the entirety becomes a tenancy in common. If that happens, any outstanding judgments against one spouse can, in fact, attach to that spouse’s interest in the property.
Tenancy by the entirety is often referred to as the “strongest” form of ownership, since property owned by the entirety cannot be reached by one spouse’s creditors. The sole exception to this protection is the Internal Revenue Service. Thus, unless a creditor gets a judgment against both spouses, the marital home is safe from attachment or forced sale.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord and lender. This column is not legal advice and should not be acted upon without obtaining legal counsel. Jacobs can be reached at email@example.com.