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Investing In Real Estate
Types of Ownership Interest
How you set up your Ownership Interest can be the most important aspect in the process. How these interests are set up will affect such things as your personal liability, survivorship, tax ramifications and what use rights you have with the property. As With most Aspects of Real Estate Investing it is always a great idea to consult with both a Tax Professional and an Attorney to make sure you optimize your investments and protect yourself from liability. The following information is provided to give you the initial knowledge so when working with your Tax Professional and Attorney, you are prepared to determine the best solution for your circumstances.
To start, we will go over Types of Estates.
These are incorporated into the deed and designate your use rights, the
amount of time these rights are in force and who the property transfers
to upon your death. As you will see, if there is more than one owner it
is important to decide the type of Estate best meeting the needs and
desires of all of the parties involved.
- Fee Simple Estate. This is when one owner has complete power to use and dispose of the property. It also allows the property to descend to your heirs. This is the highest form of ownership.
- Tenancy in Common. This is the most common form of ownership when there are two or more owners not married. Each party may own a percentage of the total property but the ownership rights are undivided. This means that each has an interest in the total property not a portion of the property. One doesn't own the kitchen and the other the Living room. In this form of ownership each individual's interest may be disposed of or inherited by their heirs.
- Joint Tenancy. This is similar in that each owner has an undivided interest in the property. However the difference is that there is a right of survivorship. This means that when one owner dies, their interest goes to the surviving owner(s). Each owner has the right to sell their interest although the buyer will become a Tenant In Common with the original owner(s). This one is good for those wanting the property to stay between the owners rather than being inherited by their heirs. When there is only one remaining owner then they revert to a Fee Simple Estate. To enter into a joint tenancy each party must have equal rights of undivided possession, ownership interest and it must be entered on the deed at the same time specifically stating their right of survivorship.
- Tenancy by the Entireties. This is basically a joint tenancy between Husband and Wife. Each party must have equal ownership interest and undivided possession and be married at the time they take title. When one spouse dies the property becomes the fee simple estate of the survivor. It can be ended by divorce or annulment, then it becomes a Tenancy in Common and each one's interest may be disposed of.
Next we will go over the Ownership rights in the different type of properties.
- Single Family Homes. When you purchase a single family home you are most often receiving the rights and responsibilities of the entire property with the boundaries set forth in the deed. There could possibly be certain rights such as mineral rights which are not included. In case of limited rights they will be spelled out in the deed.
- Condominium. In a condo you are purchasing the rights and responsibilities for the interior walls with the unit itself (this means that on the outside or boundary walls you own from the wallboard inward) and between the surface of the floor and ceiling. You also have an undivided interest in all common areas within the property of the complex. This means you have the equal use rights as all the other owners in the complex. You also have the responsibility to abide by the rules which are made by elected boards and to pay a share of the cost associated with operating and maintaining the complex. The boards have the ability to foreclose on your property for noncompliance and nonpayment of your share of the cost.
- Co-Operative. This is a different form of ownership which is sometimes found here in South Florida. In this system a Corporation is formed and actually has ownership of all the property. An individual actually buys shares or interest in the corporation which gives them the rights of use of an individual unit for the life of the Corporation. There are many different ways that the corporations are set up and for how long they actually exist. Some revert ownership in full to the developer after a period of so many years. (99 years is not uncommon) Some are set up to last forever. Another common factor of co-ops is that many require all cash or a large down payment to purchase. The major advantage to co-ops is that they are generally less to purchase than comparable condos. They can be a very profitable purchase.
Lastly we will go over the entities used to hold title to Real Estate. Here we discuss the advantages in the use of entities to control the amount of personal and tax liability associated with Real Estate. Again, It is wise to consult with your tax professional and or attorney.
- Individual. You can hold title of Real Estate in your own name. If the worst case were to come about, all your personal assets are at risk.
- Corporation. A corporation can hold title to Real Estate and your liability is limited to actual property of the corporation and to the amount you have invested in the corporation. Profits are taxed at corporate rates and also taxed at individual rates when the profits are distributed. For Real Estate Investing, Corporations are usually used by those investing in larger projects.
- S Corporations. This type of corporation has the liability advantages of a corporation but the income passes through to the shareholders eliminating the double taxation of a corporation. The disadvantages are that they are not able to pass thrum losses to the individual shareholders beyond the amount each invests. They also have legal requirements to set up which can be cumbersome.
- LLC. Limited Liability Company. An LLC has the same liability advantages of a corporation but income passes thrum to the individual shareholder as in an S Corp. Unlike the S Corp. losses can also pass through to the shareholders. This is one of the most commonly used methods and is much easier to set up for individual properties.
- Trusts. These are arrangements in which a person or entity holds
title to a property and manages it for the benefit of another. There
are too many types to lists and will need to be set up by an attorney.
Some of the advantages of a Trust are: - They can provide continuity in ownership over several generations.
- They have professional expertise in management.
- They eliminate repetitive probate costs.
- They can hide the identity of the Beneficiaries.
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