What Is an Undivided Interest in Property?

An undivided interest in property describes a form of shared ownership where multiple people hold title to an asset together. Instead of each person owning a physically separate piece of the property, every co-owner possesses a shared interest in the entire asset. This means each individual has the right to use and access the whole property, not just a specific portion. For instance, if two siblings co-own a house, they both have rights to the entire dwelling. Their ownership is defined by a percentage or fraction, which dictates their share of financial responsibilities and proceeds if the property is sold.

Forms of Co-Ownership with Undivided Interest

Two primary legal structures facilitate holding an undivided interest in property, each with distinct rules governing the transfer of ownership upon a co-owner’s death. The first, Tenancy in Common (TIC), allows two or more people to hold ownership interests in a property in either equal or unequal percentages. Each owner in a TIC arrangement has a distinct, separate share that they can sell, gift, or leave to heirs through a will. This form of ownership does not include a right of survivorship, meaning the decedent’s share does not automatically transfer to the other co-owners.

The second common structure is Joint Tenancy with Right of Survivorship (JTWROS). In a joint tenancy, two or more individuals own the property in equal shares, which must be acquired at the same time and from the same document. The most significant feature of JTWROS is the right of survivorship. When one joint tenant dies, their ownership interest automatically passes to the surviving joint tenant or tenants, bypassing the probate court process.

Rights and Responsibilities of Co-Owners

A principle of co-ownership is the “unity of possession,” which grants every owner the legal right to access, use, and enjoy the entire property. This right exists regardless of the size of an owner’s fractional interest. For example, an individual holding a 25% interest has the same right to be on the premises as an individual holding a 75% interest.

This shared access comes with shared financial responsibilities for maintaining the property. Co-owners are collectively obligated to cover expenses necessary for the property’s upkeep, with costs divided in proportion to their ownership percentages. These obligations include recurring payments such as mortgages, property taxes, and homeowner’s insurance premiums, and also extend to the costs of necessary maintenance and repairs, such as fixing a leaking roof or servicing an HVAC system.

Transferring or Selling Your Share

An owner holding their interest as a tenant in common has the right to unilaterally sell, gift, or mortgage their individual share without needing the consent of the other co-owners. This flexibility allows for the transfer of an ownership stake to a third party, who then becomes a new tenant in common with the remaining owners.

When co-owners cannot agree on the disposition of the property, one or more owners can initiate a legal proceeding known as a partition action. This court-ordered process forces the division or sale of the property. The court may order a “partition in kind,” which involves physically dividing the land into separate parcels if feasible, though this is rare for properties with single-family homes. More commonly, the court will order a “partition by sale,” where the entire property is sold and the proceeds are distributed among the owners according to their respective ownership percentages.

Tax and Valuation Considerations

Property tax assessments are levied on the property as a whole, not on the individual undivided interests. The local taxing authority sends a single tax bill, and the co-owners are jointly responsible for ensuring it is paid. Failure to pay can lead to a lien being placed on the entire property, affecting all owners.

Adding a co-owner to a property’s title for less than fair market value can trigger federal gift tax consequences. If an individual is added to a deed without contributing a proportional amount of capital, the existing owner may be considered to have made a gift of that interest. If the value of this gift exceeds the annual gift tax exclusion amount, which is $18,000 for 2024, the donor may be required to file a gift tax return, Form 709, with the IRS.

For estate and gift tax purposes, the valuation of an undivided interest often includes a “fractional interest discount.” This discount reflects the reduced marketability and lack of control associated with owning only a portion of a property. An appraiser may determine that a 50% interest in a property is worth less than 50% of the property’s total market value because a potential buyer would have to share control with a co-owner.