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Entity Ownership of Real Estate: Types, Pros & Cons

Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

In this lesson we'll discuss types of entity property ownership. We'll also discuss the different kinds of legal structures available for holding real estate for business or investment purposes as well as the pros and cons of each.

Forms of Property Ownership

A specific piece of real estate can be owned by an individual or a group. Let's see how the particulars of ownership change depending on the number of owners.

Ownership in severalty is a legal definition meaning the owner of a property is a single person or legal entity. If a distinct individual doesn't own the property, it is owned by a different business structure, such as a corporation or limited liability company.

In contrast, a real estate syndicate is formed when two or more individuals or companies pool their investment funds to buy real estate. Instead of ownership in severalty, these entities have tenancy in common or joint tenancy. With tenancy in common, each entity has a distinct and transferable share in the property. Joint tenancy requires agreement between all parties to transfer title to the property.

Additionally, real estate can be owned in different kinds of business structures. Let's look at how different business entities offer different advantages in expense, management, and taxation of real estate.

Sole Proprietor

If Bob owns and rents out his old house, he becomes a sole proprietor. In this structure there is no legal distinction between Bob the individual and Bob's landlord business. The structure is created when Bob starts renting the house. He is in complete control of the business but is also liable for all debts and losses that may arise. This is the cheapest and simplest business structure to start and maintain. Profits and losses are taxed at Bob's personal income tax rate.

General Partnerships and Limited Partnerships

Let's say Bob and Joe decide to pool their money and buy a house together as an investment property. They agree to divide the profits and make each other 50% owners in their investment business. They have formed a general partnership. As general partners they each have joint and several liable for company debts. Each person can act on behalf of the company. Whatever obligation one partner takes on as a company representative, the other partners become liable for as well. This structure does not have to be complex or expensive. Partners may want to have clear documentation made, though, to set expectations and define roles. As with a sole proprietorship, profits and losses are taxed at personal income tax rates, and profits and losses are based on each partner's percentage of ownership in the partnership.

The difference between a general and limited partnership is that the limited partnership has at least one limited partner. A limited partner is liable only up to his or her total investment and is not liable for debts of the company. Limited partners are also known as silent partners. They contribute capital and receive profits but do not have the same powers as a general partner. The limited partner cannot bind the company to a contractual agreement without consent of the general managers. Limited partnerships have more complex origination and reporting rules. The states may require registration, annual reporting, and annual franchise fees. A limited partnership has the same tax rules as a general partnership.

C Corps, S Corps, and Limited Liability Companies

A business or group of people interested in purchasing real estate can create a legal entity known as a corporation (Corp). This group can act together as if it were legally one person. A C Corp is a corporation in which the business is taxed separately from the owners and provides limited liability for the owners. Corporations must register with the state, pay annual franchise fees, and complete business tax returns at the state and federal level. Double taxation is an issue with using a corporation for real estate. The corporation pays taxes on its profits, and the owners pay taxes on their income from the corporation.

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