Co-owning property: What do heirs get?

So you and Uncle Benny want to buy a rental unit together. He’s got the down-payment money. Your income most assuredly will make the deal work. The rentals in your area are creating positive cash flow of up to $500 per month. Hey, that’s $6,000 per year as long as there are no major household breakdowns. So, what’s not to like?

Well, what if you find out later that Uncle Benny took out a cash advance from one of his credit cards, so naturally, he wants that payment of $150 to be paid each month out of the cash flow before you two touch the rental income. Now you’re not so interested in owning the rental with him.

Or, in another scenario, Uncle Benny has plenty of money, and he wants to buy you out, or worse, your good old uncle dies of a heart attack while fixing up the fixer-upper. What happens when a partner/ co-owner of a piece of real estate dies or wants to get out of the ownership of a property?

How you hold title to the property is one of those transaction details that need to be discussed, researched in detail and then decided upon before you sign the bottom line to the deed transfer, mortgage and all the other pieces of paper involved in owning real estate.

Because of the past few years of strong appreciation, a purchase in some markets may require a larger down payment, and it also may require stronger qualifying — multiple incomes — to purchase a property that will pay out a positive cash flow month after month.

As you look for a partner/co-owner, keep in mind that the way such a joint ownership takes title differs from the way a married couple would take title. Usually, the latter is joint tenancy. In joint tenancy, when one owner dies, the deceased person’s interest in the property passes on to the other title holder.

The word tenancy, as used here, deals strictly with title terminology — it does not mean occupancy of the property.

One of the best explanations of the various forms of title ownership can be found at California-based Fidelity National Title Insurance Co. Web site (www.fntic.com/ commontitle.asp).

One determining factor for partners’ choice of title is how they want the property to pass or not pass to their heirs.

Joint tenancy also can work with co-owners who are not married. Let’s say you own property with four other owners and one of the owners dies under a joint-tenancy title. The remaining three owners would absorb the interest of the deceased owner. No probate would be required under this form of title.

Tenancy in common is another common way of holding title for co-investors. The shares of the property can be held in equal or unequal parts. Let’s say four investors partner to buy a piece of real estate and they decide to divide the interest of the property according to the percentage of the amount of down payment each brought into the transaction. Thus, if each brought in 25 percent of the down payment, each would own a quarter of the property.

In tenancy in common, however, if one of the owners dies, his portion of the ownership passes to his heirs.

Those individual shares also can be sold separately without the approval of the other tenants in common.

Keep in mind, those individual shares of title also can be used to satisfy someone’s credit problems, which means if one of your co-owners files for bankruptcy, his creditors could force him to sell his share of his investment with you to satisfy debts.

Reach M. Anthony Carr though his Web log (http://commonsenserealestate.blogspot.com).

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