Saturday, September 12, 2015

Forms of Ownership: Individual Ownership

There are two basic forms of ownership, individual ownership and entity ownership. Note that ownership by a single legal entity qualifies as individual ownership.

You can hold individual ownership in property in four basic ways:

1. Sole ownership,
2. Tenancy in common,
3. Joint tenancy, and
4. Community property.

The first two of these will be discussed in this article. The others are more complex, and will be covered separately.


Sole ownership


Sole ownership of a real property means that the property has a single person as owner. Sole ownership is also called ownership in severalty. A property owned by a single legal entity is also an example of sole ownership. The entity may be a corporation, partnership, and limited liability company, etc. In sole ownership form of property ownership no division of the bundle of property rights is involved.

The transfer in ownership in sole ownership is easy to identify as change in ownership. It is also easier to identify whether an exclusion applies.

Illustration

Identify change in ownership and exclusions in following cases of property transfers:
1. Nathan sells his house to his brother Noah;
2. Sofia gifts her property to her husband William;
3. Wallis sells his property to Konya Industries Inc.; and
4. Maria & Maria LLC transfers a property to its C.E.O Matthew.

E
xamples 1, 3, and 4 are change in ownership that will trigger reassessment of the property’s value. Only example 2 is an exclusion, the Inter-spousal Transfer Exclusion, and would not be reassessed.

Tenancy in common



Tenancy in common is the default form of co-ownership in California. A common way that give birth to a tenancy in common is a situation in which a grantor conveys property to two or more individuals without specifying the form of co-ownership. The grantees take title as tenants in common and they have an undivided interest in the transferred property.

Tenancy in common is a flexible form of ownership; in it the ownership interests of owners in real property may be equal, or may vary in size from owner to owner. No matter how small an ownership interest you have in property, it is your undivided interest in the property. In addition, you enjoy unity of possession; you and other common tenants have the right to use the entire property and no co-tenant can keep the other owners out.


One point to note is that tenants in common share property’s expenses in proportion to their percentage of ownership. The Property Tax is also an expense for the owners and, therefore, they share it in percentage of their ownership.

As long as there is no change in ownership in the ownership share held in the property, no reassessment question arises. However, change in ownership attracts reassessment for the purpose of Property Tax.

Illustration

Emily, Mia, and Emma own real property worth $1,400,000. They own the property as a tenancy in common and have 70%, 20%, and 10% shares. If Mia sold her share to her friend Madison, what will happen to the assessment of the property for Property Tax?
The property will be reappraised and reassessed to the extent of share transferred i.e. 20% share of Mia transferred to Madison. In this example, if the reappraised value of the property was $2,000,000, the new assessment would be:

Initial Value                    $1,400,000
Transferred value          $1,400,000 x 20% = $280,000
Reappraised value        $2,000,000
New transferred value   $2,000,000 x 20% = $400,000
Reassessed value         $1,400,000 + ($400,000 - $280,000) = $1,520,000


Even though its actual appraised value is now $2,000,000, after the sale the property will be taxed based on a value of $1,520,000 because there was only a 20% change in ownership.

1 comment: