How is your real estate titled? It makes a big difference

When two or more people own real estate, the relationship between the owners is known as a “tenancy.” There are a number of different kinds of tenancy. Understanding the differences is important, because different kinds of tenancy can mean different rules for whether an interest in the property can be inherited outside of probate and whether creditors can claim the property.

Tenancy comes in three main forms: tenancy in common, joint tenancy, and tenancy by the entirety. Each form has its advantages and disadvantages. 

Tenancy in common. With a tenancy in common, each owner has a percentage interest in the property and can transfer that interest however he or she wants. For instance, one tenant might own 60% of the property, another might own 35%, and a third might own the remaining 5%. The owner of the 5% can sell that interest, or leave it to someone in a will. The person who buys or inherits the land will then become a tenant in common with the other owners. The main advantage of a tenancy in common is that it allows the owners the greatest flexibility to transfer the property as they wish.

Joint tenancy. With a joint tenancy, on the other hand, each owner must have an equal ownership interest in the property. In other words, if a property has three owners, each would have a one-third interest in the property. Also, you can’t leave your interest to someone in a will. If one of the joint tenants dies, his or her interest immediately ceases to exist and the remaining joint tenants own the entire property.

The advantage to joint tenancy compared to tenancy in common is that if an owner dies, his or her interest in the property passes to the other owners outside of probate. 

A disadvantage to both joint tenancy and tenancy in common is that a creditor can go after a tenant’s interest in the property to collect a debt. So, for example, if one tenant fails to pay a debt, the creditor can sue in court and have the property sold, even if the other owners object.

Tenancy by the entirety. A third form of tenancy that is allowed in some states, called “tenancy by the entirety,” is generally available only to married couples. As with a joint tenancy, if one spouse dies, his or her interest automatically goes to the other spouse outside of probate. Unlike other kinds of tenancy, though, one spouse cannot transfer his or her interest in the property unless the other spouse agrees.

The main advantage of a tenancy by the entirety is protection against creditors. If one spouse owes a debt, a creditor can’t force a sale of the property unless the other spouse agrees to the sale. A creditor can place a lien on property, which means that if the property is eventually sold, the creditor can collect from the proceeds. However, if the debtor spouse dies and the property goes to the other spouse, the creditor is out of luck because the lien will disappear and the surviving spouse will own the property with no obligation to repay the debt. (For this reason, if a couple owns a home as tenants by the entirety and they have a mortgage, both spouses have to sign the mortgage.)

In most states, if it’s unclear from the deed what the form of tenancy the owners intended to have, the law will assume that they have a tenancy in common. (However, if the owners are a married couple, some states will assume they have a tenancy by the entirety.)

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