Real Estate Partnerships

Three common partnerships to buy real estate

Whether you're interested in investment property, a new family home, or an office in a building you couldn't afford on your own, it often can be advantageous to buy Real Estate as part of a group or partnership in California.

There are many options for doing that, from forming a corporation to buying shares in a co-op, but the three most common, each with its own distinct features, are:

1) Joint tenancy - Two or more owners buy real estate at the same time and hold a single deed to the same piece of property. Ownership is divided equally among them. The owners also hold the right of survivorship, meaning that when one dies, the remaining owners absorb that person's interest in the property.

Many real estate attorneys discourage this type of ownership contract when a group buys real estate. The primary reason is that other arrangements can provide equal protection for the partners, while offering a less rigid structure and better tax protection.

For example, the right of survivorship in joint tenancy prevents an owner from passing on his interest in a property to his heirs. And, the value of the property is adjusted upward from value at the last sale to value at the time of death. The remaining partners who inherit would not have to pay capital gains tax on the increase in value on the deceased partner's share, but their own shares also would increase in value, and they would have to pay tax on that.

2) Tenancy in common - Similar to joint tenancy, except that when the group buys real estate and holds a tenancy in common, the percentage of ownership can vary from partner to partner, and there is no right of survivorship. Individual owners can sell their interests and pass them on to heirs.

By forming a partnership, individuals can increase their purchasing power, while dividing the ownership in a way that gives owners control only over their individual shares. Tenancy in common can be used for any type of property, from undeveloped land to an apartment building the group intends to buy and occupy.

This type of group ownership is becoming more common when partners buy real estate because of its increased flexibility and tax advantages. Owners can sell or pass on their share of the property without affecting the tenancy in common agreement, and heirs do not have to pay capital gains tax on the increase in value from the initial sale to value at death.

3) Community property - The default partnership, of sorts, when two people buy real estate during the course of a marriage or domestic partnership in California. State civil code gives spouses equal ownership in any property acquired while married.

Each has a half-interest in the value of the property and equal control over its use.

In the event of divorce, barring any other arrangement between the partners, the property is divided evenly between them. For example, a family home could be sold and the proceeds after taxes and mortgage satisfaction split. Or, one spouse could take the home, while the other takes any remaining property of equal value.

As with any legal arrangement, it is always a good idea to consult an attorney before you buy real estate and enter into a group ownership situation.