The Importance of Ownership Structure When Buying or Owning Real Property in Colorado 

There are a variety of ways to own real property in Colorado. Property can be owned by an individual or an entity, it can be owned jointly by multiple individuals or entities, or some combination thereof, or it can be held in trust. The way in which property ownership is structured on the deed will affect how the property is managed, taxed, sold, leased, and transferred if the owner dies, is terminated, or dissolved. Therefore, it is important to understand the different ways that property ownership can be structured and to take steps to align property ownership with the owner’s unique goals and objectives in mind. This article discusses three of the most common ways to hold property and highlights some of the pros and cons of each type of ownership structure. 

Real property may be owned by a single individual, corporate entity, or trust. This is known as “tenancy in severalty” or “sole tenancy.” A single owner makes all decisions about the property without having to seek the permission of co-owners and has the sole right to sell, lease, encumber, transfer, or gift the property. The single owner is entitled to all the benefits of the property as an asset and bears all the burdens of the property as a liability.  

Individual Ownership. It is important to note that property held by an individual owner in this manner does not automatically transfer upon death and will be required to go through probate before it can be transferred to the owner’s beneficiaries or heirs. There are ways to avoid probate. For example, a property owner may transfer real estate to a designated beneficiary or beneficiaries upon the owner’s death using a beneficiary deed so that the property automatically transfers without going through probate. However, there are specific steps that must be followed to meet statutory requirements for creating a beneficiary deed, and the transfer may affect Medicaid eligibility. 

Corporate Ownership. A corporate entity, such as a partnership, limited liability company (LLC), or corporation, may be the single owner of the property and may even exist for the sole purpose of holding the property. Having a corporate entity hold the property can be beneficial because it can shield individual owners of the entity from personal liability for the property. The type of entity chosen to hold the property will affect the tax issues associated with the property. For example, LLCs are treated as pass-through entities for tax purposes. So, an LLC member may pay taxes on rental income from the property. The entity’s structure, corporate governance documents (such as a partnership agreement, operating agreement, or bylaws), and state law typically determine issues related to possession and transfer of the property in the event the entity is terminated or dissolved.  

Trust Ownership. Real property may also be held by a trust and is a commonly used estate planning tool for non-probate transfer of property to heirs and beneficiaries. There are many types of trusts, and each type has advantages and disadvantages, depending on the unique goals of the parties involved.

Real property may be owned by one or more owners, with different owners holding unequal shares of the property. This is called “tenancy in common.” Joint ownership of property is presumed to be a tenancy in common, unless a deed expressly states that it is a joint tenancy (discussed below). Tenants in common may be individuals, corporate entities, trusts, or any combination thereof. Each tenant in common has an equal, non-exclusive right of possession of the property, but controls its own interest in the property. As such, each owner may sell, gift, or devise its own interest in the property without consent from the other owners. Joint tenancy does NOT include a right of survivorship. When one of the individual owners dies, the decedent’s interest does not automatically transfer upon death and will be required to go through probate before the owner’s interest can be transferred to the owner’s beneficiaries or successors.

Real property may also be owned by two or more individuals, with each owner having an undivided interest in the property. This is known as “joint tenancy.” Only natural persons can be joint tenants. Furthermore, the deed to the property must expressly state that ownership is a joint tenancy with a right of survivorship and meet specific statutory requirements. All joint tenants have the right to possess and control the property. As such, they must all consent to decisions related to the sale or transfer of the property. A joint tenancy includes a “right of survivorship.” As a result, when one of the owners dies, the decedent’s interest automatically transfers to the surviving owner or owners without having to go through probate. It does not pass to the decedent’s beneficiaries or heirs unless they are joint tenants on the deed. It should be noted that titling or transferring property into joint tenancy can have gift tax implications and/or affect Medicaid eligibility. A complicated set of rules also applies if one of the joint tenants transfers its ownership interest to a third party, thereby severing the joint tenancy as to that share and converting it into a tenancy in common with the other owners remaining joint tenants. 

Property ownership is far more complicated and nuanced than most buyers and owners realize. Therefore, it is critical to consult with your lawyer and your tax accountant to choose the ownership structure that is right for you, given your unique financial, business, and estate planning goals.  

BHGR’s Real Estate Group represents businesses, individuals, investors, property owners, builders, and developers in a wide array of commercial, residential, agricultural, rural, and ranch land transactions. Our attorneys have extensive experience with complex property ownership structures and work closely with our Corporate Group and our Trusts, Estates, Probate, & Tax Group to help clients meet their business and estate planning goals through property ownership.