These days, people are reacting to the home affordability crunch in different ways. One strategy people are using is to purchase property with a partner. Sometimes people seek a partnership to share costs, or to take advantage of zoning law changes that allow rental units or auxiliary buildings to be built.
But the real key to purchasing property successfully with a partner is a well thought out legal contract for shared property.
The best expert that I know on the subject of real estate law is Keith Schuman from Schuman and Associates.
Keith has more than four decades of experience in transactional real estate, and specializes in the purchase and sale of condominium and cooperative apartments, single and multi-family homes, and commercial properties. He has represented developers, owners, operators, purchasers, and sellers of industrial, retail, and residential properties throughout the United States. He also has represented landlords and tenants in commercial and residential lease transactions, borrowers and lending institutions for commercial and residential loans, co-op and condominium boards, and sponsors in the development of residential cooperatives and condominiums. Keith is particularly sensitive to the needs of first-time buyers and has extensive experience representing foreign investors. Keith assists his clients in creating limited liability companies and partnerships, helps individuals transferring their property into Trusts and LLCs, and facilitates 1031 tax deferred exchanges. Keith is licensed by the New York State Department of Education to teach continuing education classes to real estate brokers and lawyers, and has taught business law at the Cornell School of Hotel Administration.
Co-ownership involves buying a home with one or more other people, such as a partner before marriage, relatives, friends, or business partner. All co-owners will be on the title and likely also the mortgage loan.
The co-purchasers must first decide how to hold title to the property. Co-purchasers will typically either take title in a limited liability company, or in the names of the individual co-purchasers, as Tenants in Common.
A Limited Liability Company (LLC) is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. Investors typically form LLCs to buy and hold property investments for financial or legal protection, tax minimization, and flexible membership.
An alternative to an LLC is co-owning property as Tenants in Common (TIC). It’s cost effective since it doesn’t require the start-up costs of forming a business entity such as an LLC, and there are no annual fees to maintain the TIC as there are with an LLC. TIC arrangements allow each co-purchaser to own a distinct, undivided interest in the property, making it easier to manage ownership shares, occupancy rights, and exit strategies.
How you decide to split ownership in the property and structure co-ownership has implications for taxes and accounting. The actions you take can affect the tax status of the jointly owned property, your personal tax treatment, and eligibility for deferral of the capital gains tax upon sale. These considerations should be discussed with your attorney and tax advisor.
The co-purchasers must decide who will be a co-owner, and in what capacity they will be participating in the venture.
In addition, the co-purchasers must decide the following:
These are important aspects of successful legal contracts for shared property.
There are many benefits to buying property with multiple owners. By purchasing with one or more persons, you will have access to more capital and may be able to access higher value properties than you could access on your own.
Co-ownership is also beneficial from the standpoint of shared costs for large expenses like property maintenance and repairs.
For all of its benefits, there is a downside to co-ownership. Co-owners may disagree on things related to the property, such as how much to spend on home improvements and when to sell. Co-owners may also disagree about usage rights, such as use of disproportionately sized bedrooms or outdoor space, along with the value of an individual’s non-financial contributions such as management, legal or accounting contributions.
A good legal contract for shared property can help reduce the possibility of problems when partnering in real estate.
In the case where someone is contributing financially but not living on the property, the parties should consider creating a legal agreement that outlines the terms of their financial contribution and addresses various scenarios.
Here are key aspects to include in such a contract:
When one or more of the co-owners is living on the property, having a written contract is crucial to clarify expectations and protect the rights of both parties.
Here are some key aspects you’d want to include in an agreement between the parties:
