What is vesting in real estate?

If you’re planning to buy a property, it’s a good idea to know what is vesting in real estate. It will help you make a decision regarding how to hold title to that property.  

Vesting determines the legal ownership of the property. It affects various aspects such as the ability to transfer ownership, the share of ownership, and what happens to the property if the owner dies. Therefore, understanding all this is essential for property owners. It ensures them that their interests are protected and their wishes honored.

How important is title vesting?

Choosing the correct vesting method:

• Determines how ownership of the property is divided and managed.
• Affects how the property can be sold or transferred to others.
• Dictates what happens to the property when one of the owners dies.
• Different vesting methods can have varying tax consequences.

What are the different types of vesting in real estate?

There are several ways to hold a title to a piece of real estate. Each one comes with its unique implications for ownership and inheritance. If you weigh the advantages and disadvantages of each vesting option, you’ll know which one to choose. To help you make this choice, we’ve listed the primary types of vesting with their pros and cons. 

Joint tenancy with right of survivorship (JTWROS) 

This type of vesting is popular among married couples and family members buying property together. It gives everyone equal ownership rights that automatically pass to the surviving owners if one dies. It’s important to note that you can’t divide ownership unequally with JTWROS. Many people think owners have to be married, but that’s not true; any number of people can own the property together.

Pros

• Equal ownership among all parties
• Single title for the property
• Automatic transfer to the surviving owner if one dies
• Allows for more than two owners

Cons

• Heirs can’t inherit until all original owners die
• Ownership can’t be split unequally

Community property with right of survivorship

This type of vesting is exclusively for married couples. That’s why it’s crucial to disclose your marital status to avoid giving up property rights in a future divorce. This is especially important in community property states such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Here, the community property laws can dictate who gets the real estate in case of a divorce.

Pros

• Equal ownership for married couples
• Each owner can pass their share through a will
• Half the interest can go to heirs if one spouse dies

Cons

• Only available to married couples
• This may lead to unintended heirs through wills
• Applicable only in community property states

Tenancy in common

Tenancy in common allows multiple people to share ownership, with the ability to divide interests unequally. This is common for legacy homes such as family cabins or beach houses. Each owner or tenant in common can sell their interest separately, and ownership doesn’t automatically transfer upon death. That’s why it’s essential to have a will to ensure your share goes to the desired heirs. Otherwise, it may end up in probate.

Pros

• Multiple unmarried people can share ownership
• Ownership can be uneven
• Each owner’s interest can be sold separately
• Owners can pass their share to heirs

Cons 

• No automatic transfer of ownership upon death
• Can go through probate if no will is in place
• Must decide who gets tax benefits

Sole ownership

Sole ownership means one person holds all rights, title, and ownership interest in a property. Married individuals can also hold the title “sole and separate” from their spouse. If the sole owner dies, the property goes to heirs listed in a will. Or, a probate court decides if there’s no will.

Pros

• 100% control and interest in the property

Cons

• Must have a will to ensure smooth transfer after death
• Property may go through probate without a will or trust

Living trust

A living trust is a legal arrangement outlining what happens to the property if the trustor dies. It provides clear instructions to avoid confusion among heirs. Mortgage lenders allow holding title in a revocable trust because the trustor retains control over the assets. Irrevocable trusts, where someone else controls the assets, are not typically allowed by lenders for mortgages.

Pros

• Full control over the property
• Clear instructions for transfer after death

Cons

• Legal fees to create the trust
• Must disclose the trust to lenders for mortgage purposes

Who benefits from vesting?

Married couples typically choose community property with the right of survivorship to ensure the surviving spouse inherits the property automatically. Or, they may hold the title as joint tenants. 

Unmarried co-owners might opt for tenancy in common to specify their share of ownership and control what happens to their interest upon death. Sole owners who wish to have complete control but need to have a clear estate plan to manage the property after their death.

Key takeaway 

Understanding what is vesting in real estate before you purchase a property is essential if you want to know how to hold title to the property. Moreover, it will protect your interests and ensure a smooth transfer of ownership in the future. Whether you’re a sole owner, a couple by marriage, or a co-owner, knowing how the title is held and the implications of different vesting types can help you make informed decisions about your real estate investments.

Written by Ramona Sinha. October 23, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.