Legal Title? Equitable Title? Your Stake in the Deed, and Why It Matters

Holding the title to real estate involves responsibilities and duties related to the upkeep, use, and control of a specific property. The name of the property owner, appearing in the public records, identifies the person with legal title. The person named on the deed has that famous “bundle of rights” (like the right to transfer the deed) that defines ownership. 

So, that’s that. Maybe. It’s possible that others could hold equitable title, which limits the legal title holder’s control. Maybe someone holds an equitable interest in property that’s deeded in your name. Or perhaps youhold equitable title to property that someone else legally owns.

Let’s take a look at what this means.

How Equitable Title Works When…

Take a look at how equitable title works when:

There’s a life estate. One person may have rights to a home after the current title holder passes on. This brings us to the most common type of equitable ownership: the life estate. The life estate enables today’s title holder to live in the home for life and pass the “remainder” interest to someone else upon death. The one who will get that future interest doesn’t have full legal ownership until the creator of the life estate dies.

There’s a mortgage. Mortgage borrowers live in and use their homes as their own. In a deed of trust state, a third party called a trustee holds the legal title throughout the life of the loan. The borrower holds equitable title, and gradually builds equity in the home. Once the loan has been repaid, the borrower may receive the legal title—full ownership over the property and its value.

There’s an investor. An investor can hold an equitable ownership stake. This enables the owner of the equitable stake to benefit from a home’s appreciation. An investor who acquires legal title is entitled to payment from later buyers or renters. Upon receiving legal title, the investor can then transfer the deed and keep the profits if the property has gone up in value.

There’s an easement. An easement is often some form of access or pathway that someone other than the formal title holder has a legal right to use. That is, someone may hold an equitable right to some part of another person’s land for whatever purpose appears in the easement language—such as a driveway or a pathway that a neighbor, a hiking club, or someone else needs or wants to use.

There’s a trust, holding property on behalf of a beneficiary. Legal title may be held by a trustee while the beneficiary holds equitable title and may gain legal title after a certain date or event. In this situation, the trustee has authority to manage and make beneficial decisions about the property on behalf of the future title holder.

There are co-owners. Co-owners hold legal title together. But they have various kinds of equitable title. Check the deed’s vesting language. A co-owner’s equitable title matches their ownership percentage, and that’s how rental income or sale proceeds are distributed.

There’s a lease. A renter gets possession and use of the property for an agreed-upon time. The owner, called a lessor or landlord, keeps legal title to the property. Yet the renter has an equitable interest—that is, the right to use and enjoy the property, within the terms of the agreement. If there’s a rent-to-own agreement, equitable title refers to what the renter will get to use and enjoy after becoming the legal owner.

There’s an installment contract. Similar to the rent-to-own agreement is an installment contract, or contract for deed. This instrument is typically recorded in the home’s county. It notifies the public that the buyer has a right to receive the deed at the end of the contract term. At closing, the buyer gets an equitable ownership interest in the property. Thus, equitable ownership can be established through a valid, signed installment contract. The buyer lives in the home, while the seller keeps the legal title as security until all contract terms are met. When that happens, the buyer’s legal and equitable interests are unified. (But if the terms of the contract can’t be met, the buyer’s interest is typically quitclaimed back to the seller. Sellers should obtain legal advice—especially as the buyer could have created new liens on the title.)

Look out for potential rent-to-own pitfalls. Note, too, that protections against predatory contract for deed agreements have recently been enacted.

The Real-Life Consequences of Equitable Ownership

So, there we have it. Equitable ownership can belong to someone whose name is not on the deed. Equitable title can empower someone to receive full ownership in the future, or in some way benefit from the property. In short, even while one person is named on the deed, someone else could have vested rights to live in, use, or profit from the property.

This legal reality comes into play in a range of real-world situations. Here are some examples.

• A partition action can be brought by someone whose name isn’t on the deed, but has equitable rights. That means a court can be asked to divide up a property if its ownership is disputed.

• When determining an individual’s income and resources, the government recognizes that someone who is not named on a deed could still gain equitable ownership interests under state law by making mortgage payments, paying property taxes, or improving a property, for example.

• To make a home sale work, a buyer could seek seller financing. This can be important when an aspiring buyer is not able to qualify for a mortgage loan from a bank or credit union. Seller financing agreements are also used in deals among families. The parties’ rights and duties in these agreements are based on the definitions of legal and equitable ownership, and the agreements must adhere to state law.

These are just a few of the ways equitable title can impact a household’s finances and, ultimately, intergenerational wealth.

Important note: The articles on this website help keep our readers updated on news impacting deed holders and explore basic principles involving deeds. Although finances and law often come into play, our articles do not constitute financial or legal advice or any form of professional advice. This site aims to inform, but is not a substitute for due diligence. Duties and rights can vary, depending on the language of a title agreement. Title disputes can get complicated and require the guidance of an experienced attorney. Dealing with issues involving the title to a property? Consult a lawyer who handles real estate issues in your state.