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Property Co-Ownership Carries Its Risks

Posted by Daniel J. Eccher, Esq. | Jun 18, 2020

Although owning property with family may let you pass on the asset without going through probate, there are several risks, including taxes, creditor exposure, and loss of control. So when dealing with property, it is important to consider these risks and how to manage them, or to consider entirely different methods of estate and long-term care planning.

The first risk of co-ownership relates to taxes. When a portion of the property is deeded to someone other than a spouse, it is considered a gift, which can set up your heirs for estate taxes. It also means that the property will not be subject to the capital gains exception for inheritance if your family sells the property after your death (that is, your heirs would not be able to enjoy the "step up in basis" they could if they were to receive the property as inheritance). 

The second risk of adding co-owners is that you may expose yourself to creditor claims. More creditors have a claim on the property when more people have ownership. Similarly, the more people own a property, the more have control over it. That means other owners can transfer ownership, and that if you decide to sell, you would either have to get their permission or go to court to force the sale.

If you do decide on joint ownership, careful planning is a must. Decide ahead of time who will be in charge of maintenance and repairs, rent and finances, business management and licenses, property showings, move-in and move-out, etc. Also, figure out how you will share expenses; one arrangement is to do so proportionally to your shares in the property. Discuss your short- and long-term goals to figure out what you all want to do with the property. If you plan on renting, regardless of who will manage tenants, it is important to agree on tenant criteria, such as credit score and lease term length. 

Joint ownership also means deciding how to take title the property. There are at least tree options: Tenants in Common; Joint Tenants with Rights of Survivorship; and forming a business entity, such as an LLC. 

A Tenants in Common agreement means that you both own shares of the property and either of you can sell at any time. Under a TIC agreement, if one of you dies, that person's share passes on to whomever he or she named in his or her will. You could specify in the agreement that you can buy out your partner before they sell to someone else or after they die. For Joint Tenants with Rights of Survivorship, when one owner dies, that person's share passes automatically to the other. 

Another method of joint ownership is to form a business entity, which would then own the property instead of you and your co-owner. Forming a business entity would separate the property from your personal assets and insulate personal assets from debts accrued from the property and the associated business. This form of joint ownership is most common for rental property. 

An alternative to joint ownership is a living trust. A living trust is set up during your life and it is revocable. You have control and can add and remove assets throughout your life. Upon your death, the trustee (e.g., your spouse) distributes the assets the beneficiaries. 

If you have questions or need guidance with your planning or planning for a loved one, please do not hesitate to get in touch with our office by calling us at (207) 377-6966. 

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About the Author

Daniel J. Eccher, Esq.

Daniel J. Eccher, Esq. is the Managing Shareholder at Levey, Wagley, Putman & Eccher, P.A., in Winthrop, Maine. Dan's favorite problem to solve is helping clients figure out how to afford long-term care while having something left for their family.

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