6 Ways to Avoid the Hidden Dangers of Co-Owning Property

Written on March 17, 2015 by , updated on September 6, 2017

co-owning propertyCo-owning a rental property with family or friends can be an incredible experience and very profitable, if it’s set up correctly.

Co-ownership is appealing because it reduces risk and increases buying power. It takes part of the financial and managerial burden off your shoulders.

Many times, friends and family buy property together because it sounds like fun. Other times, siblings jointly inherit a property and never really have a say in the matter.

Whatever the arrangement, its success depends on the people who own it. Co-ownership works great for some people, but for many the dream can become a complete nightmare.

The devil is in the details, so the key is to plan well.

Let’s discuss some of the best ways to ensure that your co-ownership is a blessing and not a curse.

1. Divide the Responsibilities

Simply put, decide ahead of time who will be responsible for what.

For example, if you’re good with logistics, you might prefer to handle the maintenance and repairs. If your co-owner is good with numbers, perhaps he or she might want to be in charge of the rent, accounting, and taxes.

To make it work, you both should communicate with each other regularly and establish some simple processes for who is supposed to do what and when. You would tell your co-owner when a repair needs to be made and the costs, and your co-owner would send you a monthly financial statement.

Basic responsibilities include:

At the very least, it’s important to discuss these main duties with your co-owner before you find your first tenants.

2. Split Expenses Relative to Ownership

You’ll probably want to share expenses with your co-owner. The easiest arrangement is to split expenses proportionally according to each co-owners’ percentage share in the property. If you both own half the rental property, for example, then you’d share expenses, such as putting on a new roof, 50/50.

3. Talk About Goals

Discuss the reason you want this rental property and what your short- and long-term goals are.

Maybe you both want to be landlords together for the next 20 or 30 years. Maybe you want to buy out your partner in a few years to live in the rental property yourself. Perhaps one or both of you want to use the property sometimes and rent it occasionally, Airbnb style.

Whatever your goals, it’s important to discuss them now to avoid arguments later.

4. Choose How You’ll Take Title

You have two options on how to take title (three if you’re a married couple or in a committed relationship). Taking title refers to how you legally own the property together.

How you take title affects your rights to the property, so it’s wise to discuss your options with an attorney before deciding.

Tenants in Common (TIC)

You and your partner both own shares of the property. Either of you can sell ownership of your share at any time. Under a TIC agreement, if one of you dies, the deceased person’s share passes on to whomever that person named in his or her will.

Since you might not want to be stuck being a co-owner with a stranger, you can include a “right of first refusal” in your TIC agreement. That gives you first rights to buy out your partner before he or she sells to someone else. You can also include a clause in your TIC agreement so that if one of you dies during the co-ownership period, the other has the right to buy the deceased’s share.

Learn More:

Joint Tenants with Right of Survivorship (JTWROS)

This is similar to a TIC, however the big difference is that if one of you dies, that person’s share automatically passes to the co-owner. This option is typically only for married couples or couples in a committed relationship.

Learn More:

A Limited Liability Company (LLC)

This option allows you to form a business entity, and the title would be in the business’s name. You and your co-owner wouldn’t own the property — the LLC would. An LLC separates your personal assets from those of the business, and it protects your personal assets from any business debts.

Intuit created a great little infographic to help people understand the complexities of an LLC.

Learn More:

5. Make a Tenant Criteria Checklist

Whether you want to jointly screen and interview tenants or delegate the job to one person, you still need to agree on tenant criteria.

There is a lot to consider, such as whether applicants need to have a certain credit score or a certain income level to qualify to rent your property. Also, discuss how long you want the lease term to be and any other matters that are important to you (as long as your policies don’t illegally discriminate).

When reviewing applications, check out our screening checklist in The Landlord’s Guide to Tenant Screening.

6. Decide When You’ll Make Improvements

All homes need to be maintained, but when you own a home with someone else, you both need to be on the same page regarding what needs to be done and when.

For example, you can’t just decide to do a kitchen remodel, even if it’s obvious to you that the house needs a new kitchen, and expect your co-owner to pay half if you made all the decisions yourself. You can get around this problem by making a maintenance schedule that includes items such as how often to paint, power-wash and clean gutters. Any major projects, such as remodels, would need to be discussed and terms agreed on by both of you.

Many issues can arise from a co-owner arrangement, so it’s imperative that you get the paperwork right the first time. If you’ve never done this before or have never been a landlord, consider hiring a lawyer to help you write a co-landlord agreement.

If you want to write one yourself, you can always hire a lawyer to look it over to ensure you covered everything.

Infographic

If you’re considering using an LLC to hold the title, consider the pros and cons as described in this infographic.

Source: Intuit

llc-infographic

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21 CommentsLeave a Comment

  • Eric Clam

    Laura,

    1/1/1999 my wife & I as JTWROS bought as our FL homestead/primary residence a condo where we spent 7/12 months/yr while continuing to spend the other 5/12 at our house in ME bought in 1980. In 2/2010 we bought a 2nd FL condo which, effective 1/1/2011, became our FL homestead/primary residence (still spend 5/12 mos./yr in ME ). After ~20 mos. trying to sell the 1/1999 condo using our 121 exclusion, I decided to instead rent the property, taking advantage of depreciation, etc. However, if I die, my wife will inherit the condo & want to sell, paying cap gains on (I believe) any profit over 50% of its stepped up basis (I.e., after 50% deprec. recapture). This condo is ~the same value as a house my daughter bought in 2007 via her grandmom’s inheritance . My daughter is now unemployed & needs cash. My thought is to instead sell the rental condo now, buy my daughter’s house via 1031 exchange, rent it to her, and “will” it to her on our deaths. Is that still a 1031 IRS option?

    • Lucas Hall

      Hi Eric,

      From what I know about 1031 exchanges, your situation sounds like a candidate for it. However, the actual 1031 exchange and how you pass it to your daughter down the road are two different things. After the sale, you could then proceed to move it into a trust, and therefore avoid probate. Or you could transfer the deed to an LLC and make your daughter a managing member.

      There’s really a lot of options for you, but as Laura said, you have so many moving parts, it would be extremely wise to consult a tax attorney to ensure it’s done correctly based on your requirements. You’ll need help building a plan to execute this, and then a settlement company who knows what they are doing.

      Please know that I’m not a lawyer or tax professional :)

      • Eric

        Hi Lucas,

        Thanks for your reply.

        My concern is whether a 1031 exchange that includes purchasing from & renting back to a “related” party (sibling, parent-child, etc.) is now or still a permitted transaction, and I guess either a thorough reading of IRS Regs or consulting a knowledgeable 1031 attorney, accountant, or IQ is what I need to do. From what I’ve researched, it is not or is very difficult to accomplish (I.e., IRS language or experts’ interpretations is at best very confusing).

        RE probate, I couldn’t agree with you more. Every asset we own except R.E. = P.O.D. or other beneficiary designated accounts that avoid probate. Yet, our 2 residences and rental property are still owned JTWROS, which if left as such will create a probate nightmare for our daughter who lives in a different state than all 3.

        A Living Trust is likely the simplest & best document to create to avoid probate and is something I’ve needed for years (and should have created long ago).

        Thanks again!

  • Laura Agadoni

    Hi Eric,

    I’m not a tax adviser, so I can’t comment on this. Good luck on whatever you decide to do.

  • Cindy

    I keep unsubscribing and I still receive emails from from this site. Remove me from the mailingg list.

  • Delana Slater

    My mom died and left her house to me, my brother. And my sister. My brother is not paying us any of the $2025.00 a month, rent money,. Hes claiming the house has structural damage. He wont tell us how much of our share of the rent money he putting away towards it or when he plans on doing it. He will not speak to us, and not giving us our share of the money? What can I do?

    • Laura Agadoni

      Hi Delana,
      Since this is not a typical landlord-tenant situation, you would need to speak with an attorney who will need to look over all the particulars and then can advise you. You might be able to get answers from legal aid in your area as well.

  • Donna Anderson

    Should each SF rental be in it’s own LLC?, and doe’s it matter where the LLC is formed in relation to where the rental is or where you live? I live in NV, 2 rentals in AZ and 1 in NV.
    Thanks

  • NK

    Hi,
    If i have mortgage in my name for a rental property , can i still manage the rental property thru a LLC without transfering the property to the LLC?
    My bank does not lend to LLCs and i will need to refi at a higher rate if i have to transfer.

    Please let me know if i can rent and manage thru a LLC while the mortage and title is on my name.

    Thanks,
    NK

  • Greg

    Jointly owned property. 7 original shares owned Unequally between 5 owners. Inheritance and some who want to get out on the horizon. Would it serve us better to become an LLC rather than changing the deed each time there is a change in ownership (which has happened twice so far). This property is strictly summer property in Massachusetts.

  • Mildred

    If infomration were soccer, this would be a goooooal!

  • Laurie

    We have a tenant who is coming off a 2 year lease and will be signing a month to month. We have let them know that we have intent to list the home for sale. What information do we need to put in writing on the new rental monthly agreement. Thanks

  • nagendra

    can anyone help me to give detailed answer for my question pleas.

    Five coowners have made lease of company to one of the co owner , now lease period is over and how to evict him and get other four the right of property in india.

  • Vincent wells

    How do I go about buying a ckunk of property witch is 2/3of 10 acers & someone already owns 1/3 ,& its not split,who gets what part of the 10 acers

  • RE Mitchell

    My (elderly) Parents and Sister own 5 rental houses together in WA state. My parents are not well enough to physically maintain the house. My brother (who is NOT part of the partnership) got the keys from my parents to check on a house while my sister was out of town.

    My brother now refuses to let my sister have the keys stating her and my parents would get in trouble due to a state law. I call BS but my Mom & Dad are gullible.

    Are there any “laws” or other legal determinations as to why my sister who bought into the partnership, should not be allowed a key to be able to maintain the houses? As my brother is not the property manager does he violate any laws by not letting my parents or my sister have the keys back?

    Thanks

  • Sarah strickett

    I’m not sure if this site is still active butt I have an issue with my sister
    Our mother passed away and we decided to sell the property . I think ,y sister got some advice from a neighbour to sink the money in a property buy outright and I can live in it she has a home and I have rented al my life so we decided to go with that . 6 ,months later I got a job in Wales and moved there . I rent a flat and I use my rental income to pay for that my sister uses the miney to pay for her car . She is not working and has no job and. Kind of lives off her husband . A few months ago she decided to drop the bombshell that if I returned back to the flat she’s would still want her halfback of the income from it . is this right and can she do this ?

  • Sarah strickett

    Our mother passed away and we decided to sell the property . My sister got some advice from a neighbour to sink the money in a property buy outright and I can live in it she has a home and I have rented al my life so we decided to go with that . 6 ,months later I got a job in Wales and moved there . I rent a flat and I use my rental income to pay for that my sister uses the miney to pay for her car . She is not working and has no job and. Kind of lives off her husband . A few months ago she decided to drop the bombshell that if I returned back to the flat she’s would still want her halfback of the income from it . is this right and can she do this ? We have no contract and didn’t write one who is in the right here?

  • MJ

    Hi, we need help. Say my brother owns rental property, down the road was getting married, his daughter talked him into donating his properties to her with him having usufruct on them in case marriagwe didn’t work out. All of this was done through Louisiana court. My bro having usufruct, the daughter applies for loans against properties without his knowledge and doent tell bank he has usufruct, bank gices her the loans. Is that legal? She never pd loans, bank puts letter on doors of rental properties to seize properties. My brother got attorney n stopped bank from seizing them The daughter then files bankruptcy on bank loans. Before bankruptcy court she commits suicide. Does he regain his rights of ownership of properties donated?

  • MJ

    Cont’d. Bankruptcy court has been postphoned his daughter did not have a will. My brother passed away 8 mths after she committed suicide. His daughters sister has opened a succession and since my brothers passing, his wife has not collectes rent from tenants, we cant get an answer from any attorney saying she has rights to do so, the step sister and his daughters attorney before her passing has sent plain letters saying to pay rent to them, but properties going through bankruptcy, his wife is going through with case against the bank for giving loans, properties are in NO MANS LAND. Just because the step sister has opened succession does that give her rights to go demand rent. Both parties are deceased his wife alive WHO HAS RIGHTS?

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