Owning real estate is not as straightforward as most might assume. There are different ways to “own” a property, and knowing the nuances is essential for investors, estate planners, and anyone looking to protect their assets. Most people are familiar with a tenancy in common or joint tenancies, however, there is one tenancy less discussed: a tenancy in severalty.
A tenancy in severalty is a type of ownership where you (the investor) are the sole owner of the property. There are no co-owners, no shared interests, just one person or legal entity in control. While this structure may seem simple, there are features and characteristics you’ll want to learn about to fully understand the concept and how to leverage it. Below, Realized 1031 has shared an insightful guide discussing tenancy in severalty to help you out.
What Is Tenancy in Severalty?
While the name “severalty” suggests “several” owners, the word actually comes from “severed.” A tenancy in severalty “severs” or separates all other owner interests from a property to only one person or entity. There are no shared ownership rights, in short.
The tenancy in severalty offers exclusive control of property ownership. The owner has the exclusive right to use, control, transfer, lease, or sell the property as they see fit. It’s common among individuals purchasing real estate alone, but it’s also frequently used by legal entities such as corporations, limited liability companies (LLCs), or trusts.
Key Features of a Tenancy in Severalty
What specific features set apart tenancy in severalty from other types of ownership? Here are a few characteristics.
- Sole Proprietorship: Tenancy in common or joint tenancies have two or more people holding title to the property. In a tenancy in severalty, there are no co-tenants or shared interest holders.
- Complete Control: The owner has full decision-making authority. They can sell, lease, or mortgage the property without needing approval from others.
- Liability: Since there is only one owner, you will be responsible for all the property’s financial obligations, such as net operating costs like property tax, maintenance, and insurance.
- Estate Planning: The property will undergo probate upon the owner’s passing. This feature may complicate inheritance processes, so some owners transfer the property to trusts to make inheritance easier.
- No Right of Survivorship: Unlike joint tenancy, tenancy in severalty does not include survivorship rights. The property does not automatically transfer to someone else upon the owner’s death unless planned for through estate documents.
- Entities Can Be Owners: Aside from trusts, LLCs and corporations can also leverage tenancy in severalty to own real estate. This practice is common for personal liability protection and tax planning applications.
How Tenancy in Severalty Works in Practice
In real-world scenarios, tenancy in severalty typically involves a clear legal structure.. This occurs when a property is purchased by a single person or legal entity who is listed as the sole owner on the deed. This form of ownership can also arise if a former co-owner transfers their interest to a sole owner, thereby terminating joint ownership and vesting full title in one party.
Is there a difference between tenancy in severalty vs. direct ownership? We can think of tenancy in severalty as a type of direct ownership. This designation can serve as the legal definition of the type of ownership you have over the asset.
Since there are no co-owners involved in this structure, any decision regarding the use or disposition of the property, such as selling, refinancing, or leasing, can be made unilaterally or on your own. However, this designation also means that you bear full responsibility for maintenance costs, taxes, and legal liabilities.
Tenancy in Severalty Examples
Let’s create real-world examples of tenancy in severalties to illustrate how they work.
Owned by an Individual Person
John purchases a vacation home in his own name, with no co-signers or co-owners. He has complete authority over how the property is used or whether it’s rented out. This is a classic case of tenancy in severalty.
Held in a Trust
During estate planning, John considers how the vacation home may be subject to probate after his death. So, he transfers the property to a living trust, which now serves as the sole owner of the asset. Upon John’s passing, the property will be distributed according to the terms of the trust agreement, bypassing the lengthy and often public probate process.
Owned by a Business
John may also decide to turn his vacation home into a full-time rental property. To limit his personal liability and formalize the operation, he establishes “John’s Rental Properties LLC.” He then deeds the vacation home from his individual name to the LLC. Now, the LLC, as a separate legal entity, is the single, sole owner of the property, representing another example of tenancy in severalty.
Wrapping Up: The Basics of Tenancy in Severalty
While the structure of a tenancy in severalty seems basic, it represents a fundamental idea in property law: signifying sole and exclusive ownership of real estate by a single individual or entity. It may be well suited for those seeking full control and sole responsibility over a real estate asset.” Whether you’re an investor, business owner, or someone purchasing property independently, this structure may appeal to individuals or entities seeking simplicity and autonomy in property ownership..
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://trustandwill.com/learn/tenancy-in-severalty
https://www.hml-law.net/2023/01/tenancy-in-severalty/
https://www.nerdwallet.com/article/investing/estate-planning/what-is-tenancy-in-severalty
