When buying a home or investment property with someone else, whether it's a spouse or your tennis partner, you have some important decisions to make. One of those is how you will hold title to the property.
The way you take title may determine what will happen if one person dies, if you're sued or if your relationship fails. That means you should give the decision some careful consideration before you close the deal.
The best choice for any individual property will depend upon your relationship with your partner or partners, your goals, your estate plan, whether the property is an investment or a personal residence and the laws of your state.
"The big question is, do you have the same goals as far as what you want to do with the property?" says Allen J. Falke, of counsel to the Mirick O'Connell law firm in Worcester, Massachusetts. "When two people acquire property, it has been a challenge."
The choice is not always obvious, even for married couples. Two young people starting out, with each person making an equal contribution to the home purchase, might want to hold title as "joint tenants with right of survivorship." That means that if one person dies, the other inherits his or her share of the home, with no need for probate or a will. But two people in a second marriage, both of whom have children, may prefer to buy as "tenants in common," which means that if one dies, his or her heirs inherit his share of the house.
"If one spouse is putting in all the money, and the other doesn't have any money, you may want to put it in the name of the spouse who's putting in the money," says Marc Wieder, co-chair of the real estate group at Anchin, Block & Anchin in New York City. Someone who is at risk of liability in malpractice cases may choose to put the house only in her spouse's name. That way, there is little risk that the house could be lost if there is a malpractice judgment.
Unmarried couples face similar scenarios. Marriage both simplifies and complicates the situation, as states have laws that affect how property owned by married couples is handled in the case of death or divorce.
"Because there are so many unique scenarios, we'd probably say come in and talk to the lawyer," says Richard T. Bryant, an attorney in Kansas City, Missouri, who also works with the ARAG legal insurance network. "These are the kinds of questions we get three times a day."
Buying an investment property, even with a spouse, brings up additional questions, including how you will protect yourself against liability if a tenant slips and falls. And what happens if one person wants out of the investment and the other does not?
"If they both agree on the sale of the property, that's easy," Falke says. "If they don't … that may bring litigation."
He suggests a limited liability company for rental property ownership, even with a spouse. The documents forming the company can include plans for one party or the other to exit the LLC, sell his or her shares to another person or force the sale of the property, as well as spell out who pays expenses and manages the property. "If you're going to own property with someone, make sure you carry liability insurance," Falke says, to protect against judgments for accidents on the property. "If possible, have an agreement on how you're going to get out."
State laws determine exactly how an LCC works, and the cost of forming and maintaining one varies by state as well. Keep in mind that property ownership is generally ruled by state law, and states also have different laws for probate and divorce. You may want to consult a lawyer, tax professional or financial adviser to determine which legal mechanisms best suit your goals. In some cases, you may need additional documents, such as a will, prenuptial agreement, cohabitation agreement or business partnership agreement.
Here are four ways to hold title to property with another person.
Joint tenancy with right of survivorship. This is typically how married couples, as well as unmarried couples who want to leave the home to the surviving spouse, hold title. More than two people can also hold title this way, and the last person living ends up with 100 percent ownership. So if, say, four siblings owned a vacation home together, they could choose to hold title this way and have the home stay with the surviving siblings rather than be part-owned by the children of the first one to die. "Whoever dies first, their interest goes to the survivor, regardless of anything written in the will," Bryant says.
Tenants in common. With this structure, each person owns a percentage of the property, and the percentages don't have to be equal. One partner can sell his or her share to another person, and each partner can do a 1031 tax-deferred exchange, avoiding capital gains tax, for other investment property if needed. If one partner dies, his share goes to his heirs after probate. That could mean that a widow ends up sharing ownership of a home with her late husband's children, for example. "It might not be the best option for a married couple," says Christian Carson, an attorney in Cleveland. But it might be a good option for siblings who want their share of the property to be inherited by their children.
Trust. In some states, it makes sense to put your property into a trust if you want it to transfer to someone who is not on the deed after your death, without requiring probate. You can also leave instructions about how the property should be handled after your death. "A trust is kind of like a lockbox that you put your property into with a set of instructions," Carson says. "The trust is definitely the most complicated way to hold title, and it's definitely the most expensive." He notes that probate is simpler and less expensive in some states than in others, which may determine whether a trust is worth the expense.
LLC. This option can be considered both for rental property or personal investment, though the amount of liability protection it carries varies by state. "If you get sued because of something that happens to the property, you have the option to walk away" and have the LLC declare bankruptcy, Carson says. The LLC can have as many owners as you want, and you can include in the LLC documents how the sale of shares will be handled. The income and losses flow through to the shareholders. But if you want to finance the purchase, you may find the bank won't loan money to an LLC. "You might personally guarantee the loan, but you don't own the property," Carson says.