Forming a partnership with friends, relatives or a romantic partner to buy a home requires careful planning. In addition to deciding how much each person should contribute and how much house to buy, the prospective purchasers should also consider how to unwind such a purchase in case the partnership dissolves, said Jennie Farschian, partner at Jurado & Farschian, P.L.
“Before determining how to best take title with another individual, you must first sit down together and discuss what the objectives are for holding the property and what you want to happen with the property in case you pass away while still owning it,” Farschian said. “The answers to these questions can have different implications with matters such as estate planning, the need for probate, liability protection, asset protection and taxation.”
Having a written agreement in place before purchasing the property gives the buyers a plan for ending the partnership. Such an arrangement provides a hedge against any issues that may arise by outlining how and when the disposition of the property should be handled. If one partner dies, the issue becomes more complicated if the property goes through the probate process before it is sold or refinanced.
“If the parties cannot agree, a partition action (a civil lawsuit) can be brought to force the sale of the property, or to force a buy out of one parties’ interest in the property,” Farschian said.
Home buying partnerships may consider forming a corporation or a limited liability to protect their interests. These arrangements also lay out the responsibilities of each owner in the partnership.
“For LLCs you should have an operating agreement in place,” Farschian said. “For corporations, the equivalent would be a shareholders’ agreement. For people taking title in their individual names, you may want what is called a co-tenancy agreement.”
Terms that should be included are who is responsible for what (financially and with regard to the maintenance, repair, and upkeep of the property); how much is being paid by each party; how are profits (or losses) to be divided; and who has a say in whether the property is to be leased, sold or mortgaged.
In Florida, family members purchasing a property together have the option of taking title as joint tenants with rights of survivorship. That means that if one partner in the purchase dies, his or her ownership share passes to the survivor without having to go through probate.
Foreign nationals seeking to buy property in a partnership arrangement encounter additional complications through the Foreign Investment in Real Property Tax Act. The law requires a withholding on the sale of the property that has to be submitted to the Internal Revenue Service, unless the purchase was originally structured to avoid it.
“Estate taxes are a big concern for foreign nationals since the estate tax exemption for foreign nationals is only $60,000,” Farschian said. “Estate tax is due when a nonresident alien’s estate transfers U.S. property in an amount over $60,000.”