Ownership Interest In a Property and Why It Matters

Knowing your rights around a property is essential, especially when planning to buy, sell or lease. As a property owner, you have certain rights—whether individually or in co-ownership with other partners. This set of ownership rights is usually referred to as the ownership interest in a property. If you have, or plan to purchase, any property, whether individually or with fellow owners, here’s why it might be important to know what this means.

What is ownership interest in a property?

Even though the term “interest” is viewed in connection with loans, an ownership interest is not referring to a mortgage. An ownership interest in property makes you the legal owner of the property. It defines how an owner can extend their rights on a piece of real estate held either individually or jointly. A person with an ownership interest in a property can establish authority over that piece of land, house, office or any other space.

The owner’s rights are clearly defined as part of the ownership interest. If multiple people own the property, ownership interest also describes each owner’s share and claim. Knowing your rights on a property is important from the perspective of owning, buying or selling a property but can also be useful if the property ends up in a legal tussle.

How ownership interest in property works

When you have an ownership interest in a specific property, you are automatically entitled to certain rights. Ownership interest allows you to exercise your right to use the property as you deem fit—legally.

You may choose to possess and occupy the property. You also reserve the right to control what happens there and who may be allowed to enter the premises. At the same time, you also reserve the right to refuse admission to anyone. Ownership interest also gives you the right to enjoy and entertain yourself by engaging in pleasurable activities on your property so long as you abide by the local law.

Lastly, anyone with an ownership interest retains the right to sell the property whenever they wish to. In the case of multiple ownership, however, each person claiming an interest must agree to the sale.

Types of ownership interest

A property can be owned in several different arrangements. Here are the most common types of ownership interest.

Sole ownership

Sole ownership refers to an agreement where one person is the only owner of a property. Because that person controls the ownership interest entirely, they have complete control over how the property is used. Sole ownership is the most common arrangement in residential holdings by single or divorced individuals. Most states in the US also allow married individuals to buy property without their spouse’s involvement through a common-law arrangement.

In case of a sale or lease, the sole owner can make any decisions without consulting anyone else—within permissible law. However, the same can be a problem if the owner dies suddenly. Without a will—or any other supporting document—the transfer of title can be challenging and may require probate court.

Joint tenancy

Unlike sole ownership, a joint tenancy is where multiple people own the property together. Each owner or occupant enjoys equal rights and can use the property for mutually agreed-upon purposes. Although this arrangement is most common with married couples or family members, two or more people can jointly have an ownership interest in a property, even if unrelated.

The parties involved in a joint tenancy usually enter into a legal agreement that establishes them as equal partners in ownership. The profits are equally divided if they plan to rent or sell the property. If one of the partners dies, the remaining others automatically inherit equal shares through the law of survivorship without any probate court proceedings.

Besides benefits, all parties bear equal responsibilities for any property taxes, mortgage payments and maintenance of the property.

In case of a dispute, such as a separation or a divorce, joint tenancy can pose challenges to ownership. This is because both parties must agree to sell or transfer the property.

Tenancy in common

A tenancy in common (TIC) is often confused with a joint tenancy. That is because, similar to a joint tenancy, a tenancy in common involves a structure where two or more partners can share the ownership interest in any real estate asset.

Unlike a joint tenancy, however, the property may not necessarily be owned equally by all parties. For instance, one member can hold 30% of the property while two others can own individual 35% shares in the property. These shares in ownership indicate a partner’s financial liabilities but do not restrict them to a specific area on the property. If one of the partners wants, they can trade their share of the property without the consent of others.

This arrangement also allows individual owners to use their part of the property for business activities without sharing the profits with other parties. However, a property section cannot be subdivided into smaller parts without the approval of other owners.

Members in a TIC may not automatically inherit their share in a deceased partner’s ownership interest. The property in question is transferred to individual heirs as per a will. Despite this, all members bear joint and several liabilities. If one of the owners cannot pay their portions, others in the tenancy are bound to pay these dues.

All liens against the property must be cleared to sell it entirely.

“Property rights are governed by state and federal law, which can vary significantly from one jurisdiction to another," said Boyd Rudy, the associate broker at Dwellings Michigan. “In the United States, property rights are typically determined by the principle of ‘first in time, first in right.’”

This means the person who first acquires a piece of property has the superior claim to it. However, there are some exceptions to this rule. For example, if someone improves a piece of property, they may have a stronger claim than the person who originally acquired it.

Tenants by Entirety

Tenants by entirety is a unique arrangement for legally married couples. The spouses are considered a single unit, owning the property together.

The property can be sold or traded only if both partners agree. If one spouse dies, the surviving spouse inherits property ownership without probate.

However, in divorce, this type of property automatically transitions into a tenancy in common, and each owner can claim an unequal share in the property—which may be subject to the judgment in divorce proceedings. After divorce, both owners can transfer their share to any other individual without the other’s consent.

“The most common type of property ownership interest in the US is fee simple ownership, which gives the owner the right to use and dispose of the property as he or she wishes,” said Shaun Martin, the owner and CEO at The Home Buying Company in Denver. “Other types of ownership interests include leaseholds, easements and life estates.”

Community Property

Community property is another arrangement that applies to married couples. Under this provision, a couple can jointly own the property. But instead of owning the property as a unit, each spouse owns a 50% share in it. In divorce, both parties equally distribute the property, irrespective of who contributed a bigger share. Likewise, both spouses share their debts equally, and a creditor can liquidate part of the property to recover any borrowed amount according to community property laws.

Nine states in the US have community property ownership laws; these include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Couples in Alaska may optionally adopt the community property system through an agreement or by creating a trust.

Six of the 10 states allow couples to also agree upon the right to survivorship, so the title automatically passes on to the other partner in the event of one’s death. The deed can also be edited later to revoke survivorship through a mutual agreement.

Besides realty, community property includes anything acquired during a marital union, including furniture, artifacts or vehicles.

“Make sure you are aware of all the restrictions on your use and disposal of the property," Martin said. “If you have a joint ownership interest, be sure to communicate regularly with your co-owners about your plans for the property and have the terms in writing.

Be mindful of your obligations to pay property taxes and maintain the property. Lastly, if you are leasing property, be aware of the terms of your lease and comply with them.

Owning corporation

In corporation ownership, various owners can acquire and own property jointly by forming a corporation. In this type of ownership interest, the owning corporation—not the people in it—is accountable for any damages in case of a lawsuit against the corporation.

A property in a corporation ownership can be seized in a legal dispute or disposed of by a creditor to recover a debt.

Owning partnership

Two or more people can co-own a property for business or investment. Besides the types of ownership interest mentioned, limited partnerships can own a piece of real estate. In this arrangement, most owners take on limited liability and are not expected to engage in management and other decisions. A chosen member takes these decisions in their stead.

Because it is a limited liability partnership (LLP), a limited partner ownership safeguards the rights of the co-owners. The partner and the company (or the real-estate partnership) are considered different entities. In case of a lawsuit or a debt, the individual will not be directly impacted—their private assets outside the company cannot be used to recover debt or taxes.

In addition to the protection, a limited partnership also extends tax benefits to the owners. Limited liability partnerships are flow-through entities, which means the partnership itself isn’t taxed. All the income is sent directly to the owners, who are then taxed based on their earnings.

Trust ownership

In an owning trust type of ownership interest, a trustee can manage the property. Organizations and individuals can act as trustees, and the trustor allows the chosen trustee to change the property under certain conditions.

There are predominantly two types of trusts—revocable and irrevocable. In a revocable trust, the trustee can modify a property or amend the agreement at their discretion. In an irrevocable trust, the trustee can make such changes only with permission from the trust’s beneficiary.

Besides these types of ownership by businesses and corporations, some properties may be governed by a different set of regulations.

“Certain types of property, such as mineral rights, may be subject to different rules,” said Boyd Rudy, the associate broker at Dwellings Michigan. “Ultimately, any dispute over a piece of property will need to be resolved by a court.”

When ownership interest meets mortgage

When ownership interest entwines with mortgages, things get a little more complicated as the latter adds more variables to the equation. When you borrow a bank loan, you comply with a different form of interest—“security interest,” which implies that you gain ownership interest only if you meet all the mortgage contract conditions.

First-time buyers

You may be eligible for tax breaks and lower interest rates if you apply for a first-time buyer loan. But it is worth noting you will only qualify as a first time home buyer if you have not had an ownership interest in a property in the last three years. The rule applies whether you owned the property partially or fully.

Ownership interest in a business

Owning a business can impact the laxity of your mortgage application. If you possess 25% or more of any property used for a business, you will be considered a self-employed individual. This condition doesn’t waver even if you rely on it as a side hustle or do not earn much from the said business.

You must provide documentation supporting your business ownership and disclose these details when filing taxes. If you plan to apply for a loan for this business, you might be required to present your income tax returns from recent years along with business tax returns and balance sheets.

Ownership interest in a condo

When you apply for a loan to buy a condo, lenders are conscious of any chance of foreclosure. This applies to the condo you are buying and the condos around your unit. Banks and lenders can ensure the project does not lapse in terms of amenities and maintenance if a few owners back out. If financing agencies do not approve of the condo, it is called a “non-warrantable” condo.

Banks often impose certain restrictions on the number of condo units you can claim ownership interest. In a condominium with up to 20 units, you cannot claim ownership interest for more than two units. Meanwhile, for complexes with more than 20 units, you cannot own more than 25% of the total units. This ensures your foreclosure does not impact the entire project’s value.

Conclusion

Knowing your legal rights and responsibilities as a property owner is important for getting the most out of your investment. This is especially true if you share real estate ownership with other individuals or through a business partnership. Understanding different types of ownership interests can help ensure your rights to use, modify, upgrade or sell the property of your free will.