Types of Property Ownership
There are a variety of forms of ownership of property. The more common forms of ownership include:
These forms of owning real property are all present interests - that is, the owner has the rights now. There are also future interests - that is, interests in property that come into effect in the future. Typically future interests are based upon the occurrence of a contingency, such as someone dies and the decedent's interest in the property passes in accordance with his/her last will or trust.
- Joint Tenancy: property owned by two or more people at the same time in equal shares. Each joint tenant has an undivided right to possess the whole property and a proportionate right of equal ownership interest. When one joint tenant dies, his/her interest automatically vests in the surviving joint tenant(s) by operation of law. Words in the deed such as "Incapacitated and Louise, as joint tenants with right of survivorship and not as tenants in common" establishes title in joint tenancy. Not all the states allow this form of property ownership.
- Tenancy in the Entirety: some states have a special form of joint tenancy when the joint tenants are husband and wife -- with each owning one-half. Neither spouse can sell the property without the consent of the other. Words in the deed such as "Jeff and Louise, husband and wife as tenancy in the entirety" establish title in tenancy by the entireties.
- Sole Ownership: owned entirely by one person. Words in the deed such as "Louise, a single person" establish title as sole ownership.
- Tenants in Common: property owned by two or more persons at the same time. The proportionate interests and right to possess and enjoy the property between the tenants in common do not have to be equal. Upon death, the decedent's interest passes to his/her heirs named in the will who then become new tenants in common with the surviving tenants in common. Words in the deed such as "Jeff, David, Steven and Louise as tenants in common" establish tenancy in common.
- Community Property: only in states that recognize community property, (e.g., California, Arizona) a special form of joint tenancy between husband and wife, each owning one-half. Upon death, the decedent's interest passes in a manner similar to tenants in common. Words in the deed such as "Jeff and Louise, husband and wife as community property" establishes community property ownership.
Rights to Property Ownership
You have a right to do with the land as you please, subject to those restrictions imposed by law. When you own land, you can do many things with it, such as: use it; rent or lease it to others; sell or transfer it; give it away; use it as collateral for a loan; bequeath it to intended beneficiaries (by will or trust upon your death); let it sit where it is without doing anything to it (although this could create problems due to restrictions imposed by law.)
The major advantage to owning real property comes from the availability to deduct the interest of a home mortgage and a home equity loan. In order to qualify for an income tax deduction for interest paid on a mortgage:
The interest that you pay on a mortgage for your home, your vacation home, and for a home equity loan can be deducted from your income. (consult with an accountant). In order to take the deduction, Schedule A (Itemized Deductions) must be completed and attached to your 1040 Federal Income Tax Return. Many states likewise enable you to take a deduction from your taxable income for interest paid on your home, qualified vacation home and qualified home equity loans.
- "acquisition indebtedness" incurred in acquiring, constructing or substantially improving a qualified residence secured by the residence, is subject to a loan amount limitation. (usually $1,100,000 in the aggregate).
- "home equity indebtedness" (other than "acquisition indebtedness") secured by a qualified residence to the extent that the amount of the loan does not exceed the fair market value of the qualified residence reduced by the amount of the acquisition debt, subject to a $100,000 aggregate loan amount limitation.
- "qualified residence" means your principal residence and one other residence (such as a vacation home) that is not rented to others.
Real estate taxes are also deductible on your federal return. Deductible real estate taxes are any state, local, or foreign taxes on real property levied for the general public welfare. The taxes must be based on the assessed value of the real property and must be charged uniformly against all property under the jurisdiction of the taxing authority. Deductible real estate taxes generally do not include taxes charged for local benefits, trash and garbage pickup fees, transfer taxes, homeowners' association charges and rent increases to higher real estate taxes.
Considerations for the Buyer of Real Estate
Despite the risks inherent in owning real property, most people agree that owning real property is desirable.
For starters, know what you are buying. Ask questions. For example:
The buyer should consider the following:
- Are there any zoning violations on the property which will have to be corrected?
- Are there any environmental hazards which may be present (someone in the distant past may have dumped environmental hazards on the property so an environmental assessment should be made)?
- Are there any apparent conditions on the property which could potentially harm someone who happens to come on the property?
- Are there any restrictions or covenants in the purchase contract that would be hard to comply with?
- Will you be able to pay the mortgage on time?
- Are there any potential defects in the chain of title? Resolve these issues before you take title, interest or possession.
- Exactly what property is included in the sale? Lighting fixtures, drapes or blinds, refrigerators, stoves, washing machines and dryers are often problem areas.
- Is the neighborhood quiet, friendly? Are the homes well kept?
- Are there any development plans that will affect the property?
- The inspection report - are there any substantial problems with the house?
- Real estate taxes - what are the current property taxes, and what impact will your purchase have on the taxes?
Liabilities in Owning Real Property
There are many risks inherent in owning real property. Some of the more common include:
Real property owners can protect themselves from many of the risks of ownership by purchasing insurance. The two most common forms of insurance for real property includes liability insurance and title insurance.
- liability for violation of zoning ordinances.
- liability for environmental hazard clean-up.
- liability to others who are injured on the property.
- liability to others who are injured by the property (such as an uphill landowner is responsible when his land slides onto a downhill landowner's property).
- liability to third parties pursuant to contract (such as responsibility to make mortgage payments to the lender).
- liability to a purchaser when the property is sold (and there is a problem in transferring title, interest or possession).
- If you fail to maintain your property or knowingly create a condition on your property that causes injury to someone's property or person without taking steps to eliminate the hazard or provide a proper warning; you could be determined to be negligent and thus responsible for the harms and injuries that result of your negligence. To reduce your exposure to risk from owning real property, you have an affirmative obligation to maintain your property so as not to cause harm or injury to others.