Investments real estate
Property is anything that can be owned. Real estate is defined as land and all natural and manmade improvements permanently attached thereto, including air and mineral rights. All other property is personal property. To own real estate is not only to possess the physical property but also to acquire certain legal rights to its continual peaceful utilization and redistribution. Thus, when we acquire real estate, we also acquire an accompanying bundle of rights in the property. These are the rights of use, possession, control, enjoyment, exclusion and disposition, including the right to pass the property on by means of a will and they change the definition of real estate to real property.
Ownership interests in real property
How an investor holds title to real estate has a significant impact on the degree of personal involvement in management and on the amount of profit to be earned, taxes to be paid and personal liability for debts and damages. This chapter includes a review of the major forms of interests in real property, including ownership by individuals, ownership by groups such as corporations, collapsible corporations and partnerships, trusts and leasehold interests.
Individual ownership
Individuals may acquire legal interests in real property called for simple ownership. An estate in fee simple implies that the owner has the greatest bundle of rights to the use of the property. Included in this bundle is the right to use, possess, finance, lease, inherit and sell among others. Without partners to please or shareholders to impress, individuals may design their investment holdings to meet their own immediate and long term goals.
On the other hand, individual owners assume a high degree of personal investment, responsibility and liability for their investments and all the problems inherent in such tight control.
The various forms of individual ownership include tenancy by the entirety, tenancy in common, community property, joint tenancy with the rights of survivorship, sole and separate ownership, ownership in severalty and dower and courtesy rights.
Tenancy by the entirety
Tenancy by the entirety is an arrangement limited to husbands and wives that indicates the automatic right of survivorship and is not available in community property states. the owners are construed to be one entity and when one spouse dies, the other becomes the immediate sole owner. Neither husband nor wife may unilaterally dispose of his or her interest.
Tenancy in common:
Recognized in all states, tenancy in common is an arrangement in which each of several participants controls and has an interest in an undivided portion of the entire property. This relationship can be established between any two or more persons. The basic components of tenancy in common are the concepts of inheritability and undivided interests. Inheritability provides individual owners with the right to designate to whom their proportionate share of the property will pass on their demise. Undivided interests imply that no single participant can identify her or his specific portion of the subject property, but rather has the rights to the entire property and its benefits as per her or his proportionate share. Each tenant in common has an equal voice in the property?s management, unless otherwise specified and each assumes a proportionate share of the responsibilities, obligations and profits of the tenancy.
Joint tenancy with rights of survivorship
All but four states recognize joint tenancy, whereby participants, not necessarily husbands and wives, own equal undivided interests in property, subject to the rights of ownership. Any joint tenant may sell her or his interest, but the joint tenancy arrangement will be discontinued and the new owner will assume a role as a tenant in common with the remaining owners.
Although anyone may hold title in joint tenancy, it is unusual for persons other than family members to enter into such an arrangement. Remember, survivorship effectively eliminates can owner?s right to designate by will to which property interests vest. They will automatically vest in the surviving owners.
Thus, a father?s death in a joint tenancy arrangement with his wife and son results in the father?s one third undivided interest automatically vesting in the surviving wife and son, consequently raising each of their proportionate interests to an undivided one half. When the wife dies, the son automatically acquires the full interest in the property and probate proceedings are avoided each time.
Community property
Under community property, which applies only to husbands and wives, earned during marriage and property purchased with these community funds belong equally to each spouse, who, simultaneously, maintains his or her inheritable rights. Thus, the community property spousal relationship is exactly opposite to the survivorship rights of spouses who are tenants by the entirety.
Sole and separate ownership
All states recognize sole and separate ownership of property, which is an inheritable estate. Sole and separate ownership can be utilized to take advantage of special property tax exemptions, to simplify property management or to avoid inheritance taxes.
Group ownership:
In addition to individuals who own real estate investments singly, with their spouses or with others as tenants in common, there are more formal arrangements for group ownership of realty. Four important property ownership types are the corporation, the S corporation, the collapsible corporation and the formal partnership.
Trust ownership
A trust is an arrangement whereby a person or legal entity holds to a property and manages it for the benefit of another. The creator of a trust is the trustor; the holder of legal title is the trustee and the receiver of the benefits of the trust in the beneficiary, who may also be the trustor under some agreements.
Trusts may be described as discretionary trusts or irrevocable trusts. The former can be altered or discontinued at the discretion of the participants. The latter are established for a specific purpose and cannot be changed until this purpose is achieved.
Trust agreements pertinent to real estate investments include the testamentary trust, the living trust, the grantor retained income trust and the investment trust. These real estate trusts are created for many reasons, including to
Provide continuity in ownership over several generations.
Enlist the expertise of professional management.
Eliminate repetitive probate costs.
Hide the identity of beneficiaries.
Testamentary trust:
A trust may be established by the provision of a decedent owner?s will specifying that certain portions or all the property in the estate be placed into a trust for the benefit of designated heirs. This form of ownership is a testamentary trust and vests control and management of a deceased?s property in the name of a trustee. In this manner, an estate may be kept intact through one or more generations of heirs and may enjoy the benefits of professional management during the intervening years until its final distribution per the terms of the deceased?s will.
Living trust:
A living trust is often employed by land developers when acreage is purchased under the terms of an installment contract. The seller of the land is required to place the receivable contract in trust with a bank or title company together with instructions to release certain portions of the collateral land as stipulated payments are made to the trustee by the purchaser developer. The trust ends when the contract is paid in full. Thus, the land seller becomes the beneficiary of this living trust as well as the trustor. The trustee is empowered to accept payments and to issue releases and sends the proceeds from the payments to the beneficiary.
Grantor fetained income trust:
The grantor retained income trust is useful for a family with considerable real estate assets. The grantors, usually the parents, transfer titles to income producing properties in trust to a trustee for the benefit of the grantee, usually the child or children, for a period of years. During the term of the trust, the income flows to the grantors, but at the end of the trust period, the property vests outright in the grantees.Other Articles
