Shared Real Estate Ownership Agreements

Two or more unmarried people may wish to co-own real estate for a variety of reasons. These individuals may need to pool their resources in order to invest in real estate. They may be in a emotional relationship and wish to co-own the residence in which they live together. A parent may wish to assist a child in buying that child's first residence, and wish to, or have to, be on title to the newly acquired real estate. Whatever the reason, co-ownership of real estate should involve a written agreement between or among the owners in order to protect the rights and expectations of all parties.

This article assumes that the co-owners, like most people, do not create some form of formal entity such as a partnership, S corporation, limited liability company, etc.

A number of important subjects should be addressed in a written co-ownership agreement. Without these subjects being considered and addressed in writing at the being of the co-ownership relationship, serious problems can occur during the course of the co-ownership and, especially, when the relationship ends and/or when the real estate is sold.

The list of issues to consider and resolve include, but are not limited to, the following:

• What should be the form of co-ownership, tenants-in-common or joint tenancy? Tenancy-in-common as to undivided interests is usually the preferable way to co-own real estate, especially between or among non-related persons.

• What are the respective percentages of ownership. Generally, ownership interests are determined in proportion to equity contributed, but not always.

• If one party contributes more equity into the property than his ownership percentage would call for, what happens when the property is sold (or refinanced)? Does the person contributing more equity receive this amount back before the proceeds of a sale are divided according to respective percentages of ownership interest? If so, does she receive interest deemed earned on this additional amount of equity?

• What type of bank account will be opened to handle property expenses to be paid, and income received (if a rental property), and which owner or owners will be in charge of this account?

• What obligation does each owner have for paying his share of the property expenses? If one party agrees to pay a greater percentage of expenses than his respective ownership percentage, does he get this additional amount back upon sale (or refinancing), or does he obtain a growing percentage of equity with each additional payment?

• What happens if one party fails to make his required payments, or for that matter, refuses to abide by other obligations of the agreement? Should a penalty clause be inserted if one party breaches a promise found in the agreement? Is 10% of the amount owed a property penalty if the other owner has to cover that expense? When does a breach become so serious that the real estate must be sold?

• What if one owner wants to sell his interest in the property to an outside buyer? Should there be a right of first refusal given to the other co-owners? Should there be a clause requiring an objective appraisal of the interest to be sold? Or should there be an absolute mandate against any sale of an interest to an outsider, unless all, a super majority or a majority of the other owners consent?

• What happens when one party feels a capital improvement, as distinguished from an ordinary expense of the property, should be made. One party feels a tile roof should replace a shake roof in a woodsy area. One party wants to refurbish a badly outdated kitchen in a rental property. Examples abound. How should such issue be resolved by the co-owners? What type of mechanism for this solution can be inserted in the agreement?

• What happens if one co-owner goes into formal bankruptcy, or becomes legally incompetent, or dies?

• How are income tax deductions, and income, to be allocated to each co-owner? Should this matter be addressed in the agreement? If so, will the IRS respect such allocation?

A number of other issues may exist in a co-ownership situation. If an attorney is hired to draft the written agreement, should she represent both or all co-owners, or should separate legal representation (meaning more cost) be obtained by each owner?

A special type of co-ownership, typically existing between parent and child (or other close family relationship), takes a special form in order to maximize income tax benefits for all parties. This form must be set forth in a document called a "Shared Equity Financing Agreement" as required by Section 280A of the Internal Revenue Code. See more on the SEFA .