Real Property Series – Part 2 of 4: Issues & Complications When One Partner Already Owns Property

By B. Lafe Metz, Esq. & Tyler S. Dischinger, Esq.

This four part series addresses several broad issues encountered by nontraditional couples regarding the acquisition, ownership and transfer of real property. If you have not yet read part 1, click here.  (See NOTE.)

Where one partner already owns real property, and would like to create a joint tenancy or a tenancy in common with his/her partner, here are a few issues for consideration:

  • Adding the other partner to the title/deed of the real property for no consideration is not as simple an answer as it may seem, because it may trigger federal and state gift taxes. [1] 
  • Adding the other partner’s name to the title by transferring one-half of the ownership interest for arm’s length consideration should avoid estate and gift tax consequences, but may be difficult to accomplish if the property is mortgaged.  Most mortgages include “due-on-sale” clauses in which the mortgage is due to be repaid in full upon the sale of all or part of the property.  The practical effect is that a mortgage lender’s consent must be obtained before adding your partner to the title or transferring any interest in the property.  This may be challenging if the partner to be added has less than perfect credit and may give the lender leverage to renegotiate the terms of the mortgage.
  • Transferring an interest in the property to your partner for consideration may trigger real estate transfer taxes and other transaction costs.  While most states exclude from transfer tax a transfer between family members, in jurisdictions where nontraditional couples may not legally marry and the state does not provide a parallel exclusion for transfers between members of a nontraditional couple, there may be a significant transfer tax if your partner is added to the deed, whether they pay for the interest or it is given as a gift.  Consult counsel for advice on the best approach for your individual circumstances.
  • The use of a tenancy in common may be a beneficial means for gifting the other partner into ownership under certain circumstances.  Because the shares of ownership do not have to be equal in a tenancy in common, the partner that owns the property may choose to gift a share of property to the other partner each year (up to the annual gift tax exclusion amount) until the desired property apportionment is reached.  Realty transfer tax may still apply even where gift tax does not.

Please check back next week to read the third part of this four part series that will address dissolution.

[1] Nontraditional couples may face significant gift-tax burdens outside of the real property realm, due to the unavailability of marital status.  Consult counsel to determine the best strategy to minimize gift tax exposure.

NOTE: This outline provides a quick review of key issues and is intended for reference only.  Additional understanding of a couple’s circumstances and goals would be needed to provide specific advice about any real property transaction.  The practical details also may vary by jurisdiction.

Real Property Series – Part 1 of 4: Alternative Ways to Hold Real Property

By B. Lafe Metz, Esq. & Tyler S. Dischinger, Esq.

This four part series addresses several broad issues encountered by nontraditional couples regarding the acquisition, ownership and transfer of real property. (See NOTE.)

While most married couples own real estate in a form of ownership called “tenants by the entirety,” this form of ownership is not available for nontraditional couples in jurisdictions where they cannot legally marry. As a result, nontraditional couples frequently seek other forms of property ownership that can replicate the benefits of a tenancy by the entirety or achieve other goals of the couple.

Alternative Ways to Hold Real Property
There are two primary alternative ways to title real property for nontraditional couples: (1) joint tenancy with right of survivorship and (2) tenancy in common. It is helpful to understand the unique attributes of each type of ownership to make the best decision for your family about how to own property. A discussion with counsel about your unique circumstances will help determine the best form of property ownership for your family.

Joint Tenancy with Right of Survivorship
The first type of ownership often used by nontraditional couples is a joint tenancy with right of survivorship. Here are some key attributes of this type of ownership:

  • Both parties have equal ownership of the property. This is often described as an “undivided 50% interest in the whole,” as there is no dividing line or portion of the property owned by each tenant, but rather the entire property is jointly owned by both tenants equally.
  • Unless the parties agree otherwise in a joint tenancy agreement, both joint tenants share in any income or gains, as well as in the duties and obligations of owning the property. For instance, if the property is leased, or sold at a gain, the joint tenants would share the lease income or sales proceeds 50-50. Similarly, obligations like maintenance, taxes, insurance, utilities and other costs are shared 50-50.
  • When the first joint tenant dies, full title to the property vests automatically in the surviving joint tenant outside of a will or probate.
  • While the vesting of full title in the second tenant to die provides some simplicity and replicates benefits available to traditional couples, it may also complicate estate planning for nontraditional couples. For example, since title to the property vests automatically in the surviving tenant, the first joint tenant to die has no ability to leave a share of the property to an heir. Where the couple has children or other joint heirs, this may not be an issue. But if there are no children or joint heirs, 100% of the property would pass to the heirs of the second member of the couple. The person who dies first would lose the power to direct who would inherit an interest in the property. Nontraditional couples can address this issue by identifying joint heirs when they purchase the property (with the ability to change the designations later) or by agreeing that on the death of the second member of the couple, the property will be sold, with the proceeds split equally between each party’s designated beneficiaries.
  • Absent a contractual prohibition, a joint tenancy may be terminated at will by either member of the couple, which converts it to a tenancy in common (discussed below). To alter this result, the parties can enter into a joint tenancy agreement that provides alternative methods for the dissolution of the joint tenancy or transfer of interests in the property.
  • A joint tenancy can be challenging in an unpredictable relationship, because either joint tenant can “hold out” and effectively prohibit the sale or encumbrance of the entire property absent their consent. A joint tenancy agreement can also help to address this issue with a buy-sell provision often referred to as “I cut you choose.” This allows one party to name a price for the buyout, and then the other party must choose either to buy the remaining share or sell his/her share at that price.
  • Property owned in a joint tenancy may be subject to the claims of both tenants’ creditors.
  • Many jurisdictions require that if the property is owned in a joint tenancy it must be noted on the deed.

Tenancy in Common
The second type of property ownership frequently used by nontraditional couples is a tenancy in common.

  • In a tenancy in common, each partner owns a specified portion of the property. Unlike a joint tenancy, in which each party owns an undivided 50% interest in the whole, tenants in common may hold property in any proportion (e.g. 80-20 or 65-35).
  • Either party may dispose of, convey, or encumber his/her share of the property as he/she wishes, absent a contrary contractual agreement. Tenants in common frequently enter into contracts governing the sales process and restricting the parties’ rights to encumber the property. For example, a tenancy in common agreement often provides each party a right of first offer and/or right of first refusal to purchase the other party’s share before it may be sold to a third party.
  • Because there is no right of survivorship, when a tenant in common dies, his/her interest in the property does not automatically pass to the other tenant in common. Rather, it passes under their will (or under the intestacy statutes of the state, should the decedent not have a will at death).
  • If there is any ambiguity about the form of ownership in which a property is held, most jurisdictions presume a tenancy in common as the default rule.

Please check back tomorrow to read the second part of this four part series that will address issues and complications that may arise when one partner already owns property.

NOTE: This outline provides a quick review of key issues and is intended for reference only.  Additional understanding of a couple’s circumstances and goals would be needed to provide specific advice about any real property transaction.  The practical details also may vary by jurisdiction.

Adoption Tax Credit for Same Sex Couples

About the Adoption Credit

Under The Internal Revenue Code Section 36C, an individual taxpayer may claim an adoption credit for qualified adoption expenses paid or incurred by the taxpayer. The total qualified adoption expenses that may be claimed as a credit for all taxable years is limited to $10,000 adjusted for inflation (the 2012 amount is $12,650). The amount of the Same Se xAdoption Tax Credit credit is reduced proportionately if the taxpayer’s modified Adjusted Gross Income is between $189,710 and $229,710. The credit is nonrefundable, if a taxpayer owes no federal taxes, he or she cannot receive a refund; however the taxpayer can carry the balance of the credit forward for up to five years. A non-refundable credit can reduce the amount of tax the taxpayer owes to zero, but not below. On the other hand, a refundable tax credit can reduce the taxpayers to zero and the IRS refunds remaining balance to the taxpayer.

Same Sex Adoptions and the Adoption Tax Credit

Both same sex partners (if each is an adoptive parent) may qualify for the adoption credit on the amount of qualified adoption expenses paid or incurred for the adoption. The same sex partners may not both claim credit for the same qualified adoption expenses and neither partner can claim more than the amount that he or she incurred. If two same sex partners each paid qualified adoption expenses, to adopt the same child and those expenses exceed the $12,650, the maximum credit available is still $12,650. The partners may allocate this amount between them any way they agree, but the amount allocated may not be more than the amount paid or incurred.

Traditionally, qualified adoption expenses do not include the cost of adopting a spouse’s child. However, because same sex partners, even if married under state law, are not recognized as spouses under the Defense of Marriage Act, the adopting parent may claim an adoption credit to the extent provided under the law. Note that the law specifies that the adoption credit is not available to the biological parent, so the credit should be claimed by the non-biological parent. In cases like this, it is extremely important that the non-biological parent be able to prove that he or she is the one who paid for it – for example, by using separate banking accounts and credit cards. (Click here for additional IRS answers to FAQ’s regarding same-sex adoption credits).

For more information on the adoption tax credit or tax return preparation in general, please contact Lauren Sweeney in our Pittsburgh office at (412)-562-1530. Lauren is a tax specialist with over 8 year preparing both simple and complex individual income tax returns.

Oh, What a Night for LGBTQ Rights!

Oh What A Night

Washington votes “yes” on same-sex marriages, Maine votes “yes” to overturn a ban on gay marriage, Maryland votes “yes” to approve a law that allows same-sex couples to obtain a civil marriage license, and Minnesota votes “no” to an amendment prohibiting same-sex marriage.

Supreme Court to Decide on November 20 Whether It Will Review DOMA’s Constitutionality

By Kate Paine, Esq.

Unsurprisingly, the Obama Administration is pushing for the Court to review the recent Second Circuit Court of Appeals case, described here, which not only found Section 3 of DOMA unconstitutional but also held that laws that discriminate based on sexual orientation are subject to intermediate (i.e. harsher) scrutiny, rather than the First Circuit Court of Appeals case, which also found Section 3 unconstitutional but only applied rational basis review.