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

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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.

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