Legal neutrality is a way of saying "we don't take sides, so don't bother".
Legal neutrality is most often used in reference to land or territory. Any area may be classified as neutral, including a building. Upper floors of a building cannot be separately classified according to most countries' laws, meaning that a jointly-owned building cannot be 'partially neutral'.
Neutral land is not necessarily communal land. Neutral territory can be owned, bought and sold with a few extra restrictions (this, of course, applies only to places where it is normally possible to own or buy land).
These are the special rules concerning neutral land or territory:
For a neutral territory that's big enough to be a state or power in its own right, and is organised that way:
If the territory started off as part of a country, it remains part of the country unless it declares independence (a separate process). However, the rules of non-favour and non-interference apply even to its parent country.
Anyone who owns land may go through the process of classifying it as neutral. An undertaking must be signed agreeing to uphold the neutrality laws by whatever means are appropriate - hiring watchfolk, magical surveillance, etc. There are penalties for failing to uphold neutrality. One possible outcome is to lose ownership of the land, but penalties vary between countries and worlds.
There aren't many tangible or political advantages to owning neutral land (and it can be costly to make sure the laws are followed). It is more often done as a matter of conscience, personal whim or a 'gift to the people'.
Declaring neutrality is sometimes used to interrupt or prevent wars, when a disputed or strategic territory is declared no-go and thus cuts off both sides from reaching each other. Neutrality requests are sometimes denied, legally or illegally, by the host country when there is a risk of that happening.
Neutral status can in most cases be revoked, but the process can be very long-winded. Some countries require that the original land-owner be the one to revoke the status, meaning that inherited neutral land is stuck that way.
Someone neither good nor evil may be classified as neutral. See Alignment.