What type of ownership gives the owner the highest possible ownership rights over real property?

Broadly, a property could be owned in two ways – one can be the sole owner of a property or one can own it jointly along with another person. However, the joint ownership of a property can be of many types, a topic we would discuss at length in this article. We will also examine how each category of property ownership impacts the rights and duties of the owners/joint owners.

Types of property ownership

Individual ownership/ sole ownership of property

When a property is bought and registered in the name of one individual, s/he alone holds the ownership title of the property. This type of ownership is known as sole ownership or individual ownership of property. It is pertinent to note that even if other parties have helped the owner to arrange funds for the property purchase, they do not have any right in the property, if the sale deed is registered only in the name of the principal buyer. The same is explained below with an example.

Suppose a buyer has taken help from his wife, while arranging for the down payment for a home purchase. Suppose that he also makes his wife a co-applicant in the home loan application. However, the property is ultimately registered in the name of the husband. In such a scenario, the property would be held individually by the husband. While it is correct that the wife will have a legal right over the property, because of the prevalent inheritance laws in the country, it will not have any impact on the fact that the property is owned solely by the husband.

Benefits of sole property title-holding

Individual ownership is beneficial for the title holder in many ways. They hold the sole right to decide if and when they want to sell the property, legally speaking.

In the example we spoke of earlier, if the husband were to sell his house, he is not legally bound to take his wife on board. He can single-handedly decide what to do with his property. While the wife can claim her share in the sale proceeds, whether or not she gives her consent for the sale is immaterial as far as the legal formalities are concerned.

No permission from any other party would be required for the same. The division of such a property is also easier, because of the limited number of owners. When the owner dies, his property would be transferred under the provisions made in his will. If there is no will (this is known as the owner dying intestate in legal parlance), specific inheritance laws would apply and the property would be transferred accordingly among the legal heirs of the late owner.

Joint ownership/ co-ownership of property

When a property is registered in the name of more than one individual, the immovable asset is deemed to be under joint ownership. Those holding the title to the property in such ownership, are known as joint owners or co-owners of the immovable asset. It is pertinent to note that there is no difference between joint ownership and co-ownership of property under any law and the two terms can be treated as synonymous. There are several ways to own a property jointly. These include:

Joint tenancy

When the title deed of the property works on the concept of unity and provides each joint owner equal share in the property, the ownership is known as joint tenancy.

See also: What is undivided share of land

Tenancy in entirety

This form of joint ownership is nothing but joint tenancy between married people. In this system, married couples jointly hold the title of their property. In case any of the two wants to make any changes with respect to their share, they would have to obtain the consent of the other. In this case, the surviving partner will have complete ownership of the property in case of the demise of one partner.

Tenancy in common

When two or more people jointly hold a property without holding equal rights, the joint ownership would be known as tenancy in common.

Coparcenary

As the Hindu law does not provide for different types of joint ownership, the Hindu Succession Act, 1956, establishes the coparcenary form of ownership among members of Hindu Undivided Families (HUFs). In a coparcenary property, every coparcener acquires an interest by birth. This concept, which is somewhat similar to joint tenancy, allows an unborn child to have an equal share in an HUF property.

If a property is jointly held, each owner will have a say in the manner in which the property is disposed or distributed in future. Consequently, its sale and distribution would become a complicated process, if difference of opinions arise among the joint owners.

See also: Types of joint ownership of property

Property ownership by nomination

Nomination is a process under which a property owner can give someone the right over his immovable property and other assets, in the event of his death. Property nomination has also become a common practice among owners, because by way of this, the landlord can ensure that the property does not remain unclaimed or become subject to litigation after his demise.

This form of property ownership is often seen in cooperative housing societies, which make it mandatory for members to nominate a person at the time of getting membership. In the event of the death of the owner, the property title is then transferred by the cooperative housing society to the nominee.

See also: How does nomination affect property inheritance

However, a nominee does not become the legal owner of the said property, because it has been transferred in his name and he has the possession. According to a Supreme Court verdict of 1983, a nominee is a ’trustee of the property‘ and is liable to hand it over to the late owner’s legal heirs.

According to a Bombay High Court ruling in 2009, this nominee would only represent the legal heirs of the late owner in the form of a trustee and have no ownership rights over the property.

This means a nominee would have no say in the sale and distribution of the property. Buyers of property must, hence, ensure that the seller is not a nominee but an actual owner, before entering into transactions in order to avoid any legal complications in future.

Laws governing property ownership in India

Indian Contract Act, 1872

Transfer of Property Act, 1882

Indian Stamp Act, 1899

Registration Act, 1908

Real Estate Regulation & Development Act (RERA Act), 2016

Foreign Exchange Management Act, 1999 (FEMA)

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Published on Nov. 11, 2011

1. Fee Simple: Outright Property Ownership
2. Leased Fee: Land Ownership
3. Leasehold Interest: Improvements and Land-Use Ownership
4. Recommended Ownership Types

It is essential that investors know exactly what they own when purchasing real estate. For instance, if investors are considering the purchase of a property with McDonald's as the tenant, are they buying both the land and the building, just the ground under the building, or only limited rights to the building without ownership of the land underneath? Each type of ownership provides significantly different rights, returns, tax benefits, and risks. Therefore, it is important to be able to identify the different types of ownership and know the benefits and drawbacks of each.

There are three common forms of real estate ownership: fee simple, leased fee, and leasehold interest. Fee simple ownership is the most complete form of ownership available to most investors. Fee simple ownership includes title and rights to both the land and any improvements (such as buildings) located on the land. Leasehold interests effectively split ownership of the land and the improvements, whereby the land is owned outright by one party (lease fee), and the use of the land or the improvements on the land is leased for a very long time to another party (leasehold interest). This leasehold interest structure then forms two additional common ownership types; one party can be the outright owner of the land, and another party can be the outright owner of the improvements located on the land.

Fee Simple: Outright Property Ownership

Leased Fee: Land Ownership

In the case of leased fee ownership, the land owner owns the title and rights to the land, but use of the land and any improvements on the land is leased to another party for a specified period of time. This leasehold interest structure is referred to as a "ground lease" and typically lasts in excess of 40-50 years. This type of ownership is regarded as the most secure form of real estate ownership because the land owner generally does not retain any liability in the operations of any of the improvements. Moreover, upon any event of uncured default of the lessee or upon the end of the ground lease term, all of the improvements and the use rights thereof revert back to the land owner.

Leasehold Interest: Improvements and Land-Use Ownership

With the McDonald's example, the leasehold or improvements owner would retain the rights to use and receive rent from the use of the land or the McDonald's building or any other permanent structures until expiration of the ground lease. The improvements owner typically would have full control in the matter of choosing to renew the McDonald's lease when it came due or in any other property-related decisions within the ground lease period. From a tax standpoint, the improvements owner could utilize all of the improvements on the land for depreciation shelter. Since the improvements owner would not own the land, he would be able to fully depreciate the value of his ownership interest in the improvements.

According to the IRS, leasehold or ground lease interests must have terms that are 30 years or more in length (including available renewal options) in order to qualify for a 1031 exchange purchase. It is advisable to keep this in mind not only for the original purchase but also for the next purchaser down the line. If a 1031 exchanger buys a property with only 30 years remaining on its ground lease, it may qualify for its own 1031 exchange, but by the time the exchanger looks to resell the property, it would not qualify for another purchaser's 1031 exchange. This would reduce the number of potential buyers and demand for the property and likely hurt one's ability to recoup the original investment.

Recommended Property Ownership Types

Despite the tax benefits and higher income that can be associated with improvement ownership on a ground lease, we tend to avoid this form of ownership. Unless the ground lease term is in excess of 50 years and in areas of the country where excess demand and limited supply of land have required states to step in and offer ground lease ownership to promote business growth (such as Hawaii, New York, and parts of Florida), improvement-only leasehold interest ownership poses significantly more risk to the owner, as the underlying ground lease may not be renewed at the end of the term. That being said, we primarily advise investors to target leased fee and fee simple ownership, as we believe that these types of ownership offer more secure forms of real estate ownership and a better long-term ability to maintain property value. If investors require tax shelter on their income, fee simple property ownership provides both depreciation and greater ownership security.