By Jones Osborn II

Sometimes two or more people will jointly purchase real property, usually as an investment. Land in particular is often purchased this way, but sometimes vacation or income properties are also purchased jointly. The intent is usually to break the cost down into smaller, more affordable units.

There are a number of ways to implement joint ownership. For example, property can be purchased by several people as co-tenants, or it can be purchased by a partnership or other entity made up of the co-owners.

Co-Tenancy. This simplest way to share ownership is to take title as co-tenants, so that each owner owns an undivided fractional interest in the property. Many properties have been purchased this way over the years. Although this form of ownership is simple, it can create a number of problems, including the following:

a. The property can be sold only by unanimous agreement of all owners. One uncooperative owner can block a sale or lead to a lawsuit for petition.

b. One of the co-owners may transfer his interest to a third party, forcing the other owners to become co-owners with a new person without their consent.

c. Most actions involving the property require the signature of all co-owners, creating difficulties if some are unavailable or refuse to cooperate.

d. There is no enforcement mechanism if some owners refuse to pay their share of taxes, insurance, or other expenses.

e. Title can become clouded over time as individual co-owners die, become divorced, put their interest in trust, and so on.

Fortunately, these problems can be easily avoided with a little foresight.

Co-Ownership Agreement. One solution is to enter into a recorded co-ownership agreement. Each joint owner still holds title to his own share of the property, but the agreement can provide a mechanism for selling the property (perhaps by majority vote), a right of first refusal to help avoid unwanted co-owners, and an agreement to share expenses. Sometimes such agreements also provide for an "unwinding" mechanism, whereby any partner can set a value on the property, and the other owner or owners have to either sell to the first co-owner or purchase his interest at that price. In short, co-ownership agreements are flexible, and can be drafted to provide whatever provisions the co-owners desire.

Some people like to hold title this way because they feel more comfortable having recorded title in their own name, rather than in a partnership or some other entity in which they own an interest. A disadvantage with this approach, however, is that over the years title can become clouded as people die, judgment or tax liens attach to certain co-owners, property is transferred, and so on. The more owners there are, the more title problems that can arise. In addition, each co-owner has unlimited liability if a lawsuit should arise out of the property.

Formation of Entity. To avoid these problems, an entity can be formed to hold title. In the past, general partnerships, limited partnerships, C corporations, and S corporations have all been used for this purpose. Today, however, a limited liability company is usually the best choice. In some cases, however, a Subchapter S corporation may be better, based on tax considerations. A tax consultant can help you determine the best choice for the type of property you have in mind.

There are two principal reasons why a limited liability company or a subchapter S corporation are superior to ownership by co-tenancy, even with a co-ownership agreement. The first is that the limited liability company provides what its name implies--limited liability. The same is true for a corporation. If someone is injured on the property, or possibly if environmental problems arise, these entities can provide valuable protection from unlimited liability. The second is that title is held by a single owner--the limited liability company or corporation. This greatly facilitates keeping title clear and in conveying or otherwise dealing with the property.

One disadvantage of using an entity to hold title, however, is that the individual members or shareholders cannot engage in a tax-deferred exchange when the property is sold. The entity itself may engage in an exchange, but the individual members or shareholders cannot because they hold an interest in the entity, not in the property itself. This can be a problem if some of the co-owners want to do an exchange but others do not.

Conclusion. It is generally unwise to hold title as co-tenants unless a co-ownership agreement is executed to facilitate the sale of the property, payment of expenses, and other features designed for the mutual protection and convenience of the co-owners. In most cases, an even better solution is to form a limited liability company or subchapter S corporation to hold title, both to provide for limited liability and for the convenience of holding title in a single entity.