Deed of Trust Basics: How Co-Owners Record Unequal Economic Shares

Deed of Trust vs Co-Ownership: Practical Investor Guide

A deed of trust is either a loan security instrument or a private agreement about who gets what from a property. In many U.S. states it secures a lender’s rights against real estate; it does not split equity among co-owners. In England and Wales, a declaration of trust, often called a deed of trust, records the co-owners’ beneficial shares and how cash flows and sale proceeds are divided.

The goal for joint investors is simple: put the economics in writing, line up lender and registry requirements, and keep tax, reporting, and exit mechanics aligned with the agreed split. If you miss any one of those, the numbers in your model will not match the numbers in your bank account.

Align incentives to avoid conflicts later

Set expectations early so the co-ownership does not stumble at approval or exit.

Equity co-owners: Want distributions, control, and exit rights to reflect capital at risk and any negotiated promote. They also want guardrails against an unexpected sale or refinance.
Lenders: Want clean collateral and control over transfers. Hidden interests or messy co-ownership terms slow approvals and complicate enforcement.
Tax authorities: Expect reported income and gains to match beneficial ownership.
Registries: Focus on clear legal title and required disclosure of beneficial controllers.

Know the local rules before papering the deal

England and Wales – document beneficial shares and protect against survivorship

Title form: Legal title can be joint tenants, which carries survivorship, or tenants in common, which allows separate shares. The Land Registry uses a Form A restriction for tenants in common, blocking a sole proprietor from selling and signaling that survivorship does not apply. If you need a refresher on title entries, see how to read an HM Land Registry title.
Declaration of trust: Sets beneficial ownership – fixed percentages or a formula that adjusts for deposits, mortgage payments, and capital improvements – under the Trusts of Land and Appointment of Trustees Act 1996.
Overreaching protection: A buyer from two trustees, or a trust corporation, takes the land free of beneficial interests, which then attach to proceeds. A restriction requiring two trustees protects beneficiaries.
Overseas entities: If an overseas entity holds legal title, it must register its beneficial owners on the UK Register of Overseas Entities before transacting with land.

United States – separate security from equity allocation

Security vs equity: Deeds of trust or mortgages secure loans. They do not allocate equity. Co-owners split economics through either a tenants-in-common deed plus a TIC agreement or an LLC operating agreement if the property sits in an LLC, the market standard for income property. The operating agreement typically sets the distribution waterfall.
Lender structuring: Lenders usually require a single-purpose entity as borrower and will underwrite the JV terms. If title is held by TICs, expect a lender-driven TIC agreement with transfer restrictions, cash controls, and bankruptcy waivers.
Transfer triggers: Transfers of beneficial interests can trigger due-on-sale clauses, transfer taxes, or property tax reassessment. California’s change-in-control rules for entity-owned real estate are a frequent trap.

Australia – record shares on title, augment with a co-ownership agreement

Title split: Land registries record tenants-in-common shares on title. Co-owners often add a co-ownership agreement to cover contributions, expenses, decision rights, and exits.
Nominee use: Bare trusts show up where required, such as SMSF borrowing structures. Outside those cases, a bare trust can hold title as nominee without changing the underlying economics.

Canada – registries show shares, bare trusts are common nominees

Title split: Land registries record legal co-ownership proportions. Bare trusts are common nominee vehicles, especially for corporate titleholders.
Reporting changes: Canada has expanded trust reporting that now captures many bare trusts.

Turn percentages into cash flow that actually pays out

You need an instrument – declaration of trust, TIC agreement, or LLC operating agreement – that converts agreed percentages into day-to-day money movement.

Capital contributions: Record initial equity, any preferred return, and who must fund future calls. If a party can opt out, state the consequence: a loan from other investors, a penalty rate, or dilution. This avoids “I thought you were paying” disputes.
Debt liability: Clarify joint-and-several vs several liability among co-owners. If the external lender looks only to one borrower, set indemnities that align internal liability with agreed shares so no one ends up with unexpected recourse.
Operating cash waterfall: A common order is: (1) property taxes, insurance, and senior debt service; (2) operating expenses and reserves; (3) repayment of co-owner advances with agreed interest; (4) preferred return on unreturned capital; (5) return of capital; (6) profit split per fixed percentages or promote. The waterfall sets priority and speeds distribution reviews.
Sale or refinance proceeds: Mirror the operating waterfall or set a specific sale waterfall. If you track capital accounts, clear those to zero before profit splits to prevent endgame disputes.
Expenses and CapEx: Specify who funds CapEx and how those amounts adjust beneficial shares. If shares float with new money, set measurement dates and evidence standards. If shares are fixed, say when a contribution is a loan rather than equity.
Control and consent: Require unanimity or a supermajority for sale, refinance, new debt, manager changes, major leases, significant CapEx, litigation, and related-party deals.
Transfers and exits: Add transfer restrictions, ROFO or ROFR, tag and drag rights, and forced-sale tools. For two-party structures, include a Texas shoot-out, Dutch auction, or buy-sell to break deadlock.
Information rights: Provide monthly reporting, bank access, and tax schedules to avoid information asymmetry that poisons partnerships.

Make the split auditable in real life

An agreement that only a spreadsheet can interpret will fail under pressure. Build simple controls so any stakeholder can recompute payments from bank statements.

Dedicated account: Use a single operating account with lender-aligned cash controls. Route all revenues there, and pay expenses in priority order.
Evidence standards: Require third-party invoices, completion certificates, and wire receipts for any capitalized item that affects the split.
Quarterly audit pack: Deliver a one-page “property cap table,” waterfall outputs, and bank reconciliations. If a neutral reviewer cannot recompute the waterfall in under an hour, simplify.
Data room discipline: Store versions, Q&A, and approvals in a versioned drive so you can prove the economics later without forensic work.

Documentation you will actually use

England and Wales – align TR1, declaration, and restrictions

TR1 transfer deed: Complete the joint ownership section on acquisition. The TR1 can reference the declaration of trust or specify the beneficial split directly.
Declaration of trust: Include parties’ capacities, beneficial interests, treatment of mortgage payments, taxes, insurance, CapEx, income policy, decision rights, dispute resolution, exit process, valuation method, mutual indemnities, and any managing co-owner’s authority.
Land Registry restriction: Enter Form A for tenants in common and consider a bespoke restriction requiring two trustees for dispositions. Obtain lender consent so the charge ranks and enforces cleanly. This is also a good point to review title defects and any easements and access rights that could affect later sales.
Lender’s security: The charge sits ahead of beneficial claims; the declaration governs only surplus proceeds after discharge.

United States – coordinate title, JV terms, loan, and title insurance

Title conveyance: Convey as tenants in common with stated percentages if desired; otherwise, leave percentages to the TIC agreement.
JV agreement: Use a lender-consistent TIC agreement or an LLC operating agreement that mirrors the economics above and adds separateness and bankruptcy covenants. If you opt for an entity, consider whether an SPV model improves bankability.
Loan documents: Expect transfer consent thresholds, cash management, single-purpose entity covenants, and co-ownership riders if multiple TIC borrowers.
Title insurance: Notify the insurer of the co-ownership setup and secure endorsements. This is where hidden title defects often surface.

Australia and Canada – register shares and add a nominee if needed

Transfer and title: The register records tenants-in-common shares. A co-ownership agreement covers economics and governance.
Bare trust deed: If using a nominee, state nominee capacity, pass-through of all income and expenses, and any lender or registry requirements for the trustee on title.

Costs and a quick example

Expect one-time costs for legal drafting, lender counsel, title or registry fees, and any transfer duty or stamp tax for beneficial transfers. Recurring costs include entity administration if used, trust or nominee fees, and tax compliance for co-owners or the JV entity. These are modest line items compared with asset value, but they compound if the structure is needlessly complex.

Example: Two investors contribute £700,000 and £300,000 and borrow £1,000,000 on a UK asset. They agree a 6 percent non-compounding preferred return on unreturned equity and a 70-30 split thereafter. Over three years, net operating cash after debt service is £180,000; CapEx totals £60,000, funded 70-30. On sale, net proceeds after debt are £1,400,000. The waterfall repays CapEx advances to equalize capital accounts, pays accrued prefs, returns capital to zero, and splits profit 70-30. If a party missed a required call, apply the agreed penalty or dilution first. The result pays who took risk, in the order they took it.

Accounting, reporting, and who consolidates

Direct TICs: Direct tenants-in-common holders usually report their share of income and expenses. In the U.S., if co-owners go beyond customary activities, the arrangement is a partnership, which triggers a partnership return and Section 704(b)-consistent allocations.
U.S. GAAP: An LLC without a controlling member is typically equity-method under ASC 323. If a member has control or is the VIE primary beneficiary, consolidate under ASC 810.
IFRS: Determine whether the arrangement is a joint operation, recognizing your share of assets and liabilities, or a joint venture, using the equity method under IFRS 11.
Nominees: Bare trusts are often transparent for financial reporting. The beneficiary books the underlying assets and liabilities with structured-entity disclosures where applicable.
Beneficial ownership filings: U.S. LLCs and corporations may need to file BOI with FinCEN. Overseas entities holding UK land must maintain ROE filings. Canada’s expanded trust reporting now covers many nominee or bare trusts.

Tax flags worth checking early

England and Wales

Spouses: Spouses or civil partners split rental income 50-50 by default unless a Form 17 election matches actual beneficial interests and is supported by a declaration of trust.
CGT and SDLT: Capital gains follow beneficial shares. Transfers of beneficial interests can be disposals for CGT and can trigger SDLT, including debt assumptions. Lender consent is typically required.

United States

Partnership vs co-ownership: If facts make it a partnership, file Form 1065 and ensure allocations track the economics in the agreement.
Allocations and depreciation: Allocate depreciation, interest, and expenses by ownership share or as the operating agreement provides. Maintain consistent capital accounts.
Transfer triggers: Exchanges can trip due-on-sale, trigger transfer taxes, and cause property tax reassessment. Review transfer taxes and stamp duties rules. Foreign investors should check FIRPTA and treaty relief.

Canada

Bare trust reporting: Expanded trust reporting captures many bare trusts that hold title for others. Trustees and beneficiaries should check filing thresholds and timelines well before year-end.

Regulatory checkpoints that can stall closings

KYC and AML: Conveyancers, lenders, and trust or company service providers verify identity and source of funds. Overseas entities dealing with UK land must keep ROE filings current.
Beneficial ownership registers: FinCEN BOI in the U.S., UK ROE for overseas entities, and provincial or state variations in Canada and Australia.
Securities law: Selling fractional interests to passive investors can be a securities offering. A closed, active co-ownership among a few principals usually avoids that, but test the facts before marketing.
Lender compliance: Most loans require consent for transfers, even for beneficial interests. Align your deed or agreement with loan covenants early.

Edge cases that break deals – and how to guard against them

Overreaching and survivorship: In England and Wales, use a Form A or bespoke restriction to require two trustees and avoid losing priority on a sale by one trustee. If co-owners hold as joint tenants by mistake, sever promptly or survivorship can override unequal shares on death.
Foreclosure priority: In the U.S. and UK, the lender’s security ranks ahead of beneficial splits. Your internal allocation governs only surplus after the loan is paid.
Co-owner insolvency: Creditors can attach a debtor’s share. Set cure rights, buyout mechanics, and bankruptcy protections. For entity borrowers, consider springing members and SPE features.
Deadlock: Equal votes with no breaker invite paralysis. Add ROFO or ROFR, buy-sell tools, or forced-sale triggers.
Tax or reporting slippage: Misaligned allocations vs filings invite penalties, from UK Form 17 errors to Canadian bare trust reporting failures and U.S. partnership mismatches.
Documentation drift: Side letters that never reach the lender or registry are unreliable. Put essential terms where third parties will respect them.
Change-in-ownership traps: Small transfers can aggregate into control shifts that trip reassessment or breach loan covenants.

Choosing the right structure for your deal

LLC or LLP JV: Pros include ring-fencing, lender comfort, flexible waterfall, and clean equity-method accounting. Cons include entity administration and possible transfer taxes on membership transfers.
Direct co-ownership: Simpler and often lower admin with clear entitlement via declaration or TIC. The trade-offs are exposure to a co-owner’s personal creditors and more friction with lenders.
Nominee or bare trust: Useful when registries or lenders require a single titleholder. Transparency rules reduce the appeal of opaque nominees.
TIC syndications: Quick to assemble but bring coordination challenges, lender limits, and potential partnership tax treatment.

Execution timeline that keeps lenders calm

Weeks 1-2: Decide on direct title vs entity. Lock the economics, capital calls, governance, and exit. Run quick tax checks for SDLT or transfer taxes, CGT or Section 704(b), and reassessment risk.
Weeks 2-4: Draft the declaration, TIC agreement, or operating agreement. Secure lender consent to transfer and ownership restrictions, SPE terms, and cash management. Line up registry restrictions and title endorsements.
Weeks 4-6: Execute at closing. Register conveyances and restrictions. Open bank accounts and implement cash controls. File required BOI, ROE, and trust reports.

Kill tests and common pitfalls

Kill tests – walk away if these fail

Lender veto: The lender will not consent to the structure or beneficial transfers.
Tax leakage: Transfer taxes, reassessment, or CGT erase the benefit of the reallocation.
Securities exposure: The plan involves selling interests to passive investors without an exemption.
Unauditable formula: The rebalancing math cannot be verified with available data.

Frequent pitfalls – fix them upfront

No waterfall: Only percentages stated, with no waterfall to address CapEx, debt paydowns, and prefs.
Missing restriction: Skipping a Form A or bespoke restriction in England and Wales.
Partnership blind spot: Ignoring partnership tax rules in U.S. co-ownerships.
Opaque nominees: Using nominees without handling modern beneficial ownership reporting and KYC.
Loan mismatch: Misaligning co-ownership terms with loan covenants.
No exit tools: Omitting deadlock and exit mechanics.

Drafting habits that save time

Time-stamp money: Label contributions as equity or loans with evidence standards. Keep explicit capital-account mechanics.
Evidence-based floats: Tie floating percentage adjustments to third-party invoices and bank evidence with a clear cutoff date.
Hard-wire priority: Bake the distribution waterfall into the agreement with tie-breakers for calculation disputes.
Define authority: Spell out the managing co-owner’s authority and standard of care. Add indemnities for actions taken within authority.
Default cures: Include a call option on prolonged default with cure periods matched to loan default timelines.

Country-specific compliance checklists

England and Wales: Complete TR1 joint ownership; execute a lender-consistent declaration; file Form A or bespoke restriction; confirm ROE status for any overseas entity on title.
United States: Align TIC or operating agreement with loan documents and SPE covenants; check transfer tax and reassessment before any beneficial transfer; complete FinCEN BOI filings; document Section 704(b)-consistent allocations if using an LLC; consider a simple JV agreement template to accelerate drafting.
Australia and Canada: Ensure title percentages match economics or bridge via co-ownership agreement or bare trust; confirm Canadian bare trust reporting; align nominee structures with lender and AML or beneficial ownership rules.

Key Takeaway

Recording unequal shares is straightforward if you separate three things: legal title, beneficial ownership, and lender rights. In England and Wales, a declaration of trust plus the right Land Registry restriction does the heavy lifting. In the U.S., most professional investors use an entity operating agreement; a direct TIC works if the lender signs off. Australia and Canada rely on registered shares with a co-ownership agreement and, where needed, a bare trust. Keep the structure simple while meeting lender, tax, and reporting constraints, lock the waterfall so it can be administered without heroics, and avoid transfers that cause reassessment or tax leakage. If you are still choosing a vehicle, weigh SPV vs personal name trade-offs before you wire any money.