Legal and Financial Issues to Consider When Co-Owning a Home

Learn the different ways to hold title to a house, how to split financing, and the legal rules that apply when you co-own a home.

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When you buy a home with others, you're not just entering into a living arrangement: You're entering a legal relationship as well. How you own a home together determines how you can get financing, what your rights and responsibilities are, how and to whom you can each sell or leave your share of the property, and more.

There are a number of ways to own real estate in shared housing arrangements. Here’s a brief overview of the most common arrangements for different types of shared housing, to help you start thinking about how you'll own and finance your shared home.

How to Take Title to a Co-Owned House

Because real estate ownership is governed by state and local laws, we can't cover all the legal ins and outs of various ownership arrangements. For this, and to draft and review the necessary legal documents (such as a tenancy-in-common agreement), your group should definitely consult a lawyer.

Tenancy in Common (TIC)

When you own property as tenants in common (TIC), you each own an undivided share. For example, if you own a duplex with another person as tenants in common, you each own a portion of the whole building, even though each of you may live in and maintain one of the units. TICs are customarily used when two or more unrelated people own a home together, and are also frequently used in multiunit residential buildings, such as a duplex or triplex.

If you take title to property as a TIC, you and your co-owner(s) will want to draft a written agreement covering each owner's rights and responsibilities. For multiunit property, the TIC agreement gives each owner rights to, and responsibility for, one unit, which creates a feeling of separate ownership. You'll also have to figure out financing. Until recently, owners of TICs usually financed their property with a single mortgage secured by the whole property. This arrangement creates some problems, however: All owners must qualify together for the loan, for example, and all owners are at risk if one gets behind on the mortgage. Although the single-mortgage approach is still used for sharing a single-family home, many lenders now offer fractional mortgages for TIC properties that are easier to divide into separate units. For a fractional mortgage, each owner signs a separate promissory note and deed of trust. Each must qualify for the loan separately and can select different loan terms. Each fractional mortgage is secured only by that owner's interest in the property.

Joint Tenancy

Joint tenancy is a form of ownership that includes a right of survivor­ship. When one owner dies, that person's share of the property passes automatically to the other owner(s); in contrast, a TIC share goes to the owner's heirs at death. Joint tenancy is most often used by couples and families, but it could also work well for unrelated owners in a small shared housing arrangement who want the security of knowing that their interests in the property will be protected if another owner dies.

Forming a joint tenancy usually requires that all owners have equal interests in the property, and that they acquired title at the same time, on the same title document. Most joint tenancies are financed with a single shared mortgage.

Limited Liability Company (LLC)

In the process of developing shared housing, such as cohousing, many groups form a limited liability company (LLC) that holds title to the property. By forming an LLC, the group becomes a legal entity and can enter into contracts, which allows it to purchase land and partner with developers and contractors. The LLC form of ownership also provides liability protection to individual group members, should anything go wrong during the development process.

When the shared housing project is developed, the LLC transfers title to the land and individual units to the members, usually in the form of a TIC or condominium. Once the project is complete, continuing to hold the land as an LLC creates certain disadvantages to the owners. For example, owning property through an LLC means that owners cannot deduct mortgage interest and property tax payments, and can't claim the $250,000 capital gains tax exclusion if they sell their residence.

Financing Options for a Co-Owned House

If you purchase a single-family home, you and your co-owner will likely have to take out one mortgage loan.

When you sign a mortgage with someone else, you become "jointly and severally liable" for the mortgage, which means that both of you are liable for the full amount. If one owner doesn't pay, the other will have to pick up the slack to avoid a delinquency on the account, penalties, or even foreclosure. Before signing on to a shared mortgage, you and your co-owner should have a serious talk about your financial situations and how you'll handle it if one owner can't keep up with the payments. You might decide that one owner can make the other owner's missed payments and either be reimbursed or obtain a higher percentage of ownership in exchange. Of course, the best way to avoid problems is to buy a house in your price range, make sure both of you can comfortably afford the mortgage and other expenses, and create an emergency fund (or get insurance) for unexpected events like a job layoff or medical problem.

You should also think about how you'll make mortgage payments if one of you dies. One strategy is to take out life insurance policies on each other, so that if one owner dies, the other will be able to keep up the payments.

There are many ways to divide your responsibility for financing. You can agree to handle things in whatever way suits your needs best. Although you will be jointly and severally liable for the mortgage, you might decide that one of you will pay a larger share to reflect ownership of a larger percentage of the house, to reflect use of more of the shared space, or simply because that person can afford to pay more. Also, you don't have to split your down payment and ongoing mortgage payments the same way. For example, Alice might have significant savings but a low monthly income. Linda might have very little savings, but a high paying job. In this situation, Alice could pay 75% of the down payment but assume a smaller portion of the mortgage payments.

Legal Restrictions on Shared Housing

Municipal laws may impose some restrictions on whether and how you may share housing in a particular neighborhood. If you move into a planned community, its rules may also limit your shared housing options.

Zoning Rules

Each city or county has a planning agency that enacts zoning ordinances controlling how particular neighborhoods are used. Typically, planning agencies divide residential neighborhoods into different zones. Some zones allow only single-family homes; other zones allow multiunit dwellings; others allow commercial or light manufacturing activities, and so on. The intent of these laws is to control the atmosphere and quality of neighborhoods and to control population density.

Zoning rules can conflict with shared housing in several ways:

  • restrictions on how many people can live in a home and how many unrelated people can live together
  • restrictions on the number of dwelling units on a parcel of land
  • limits on building sizes and the number of buildings you can have on each lot, as well as building height and proximity to the property line, and
  • extra requirements for multiunit housing, such as a certain number of off-street parking. spaces.

To find out how your neighborhood is zoned, look at your city's general plan, ask someone at the planning agency, or check your city's website. If you find a law that could pose a barrier to your sharing arrangement, don't despair. You may be able get a special permit or request an exception to the zoning rules (called a "variance"). Although the application process varies, you'll probably have better luck if you get the support of your neighbors. Often, the planning agency's biggest concern is whether your plan will adversely affect the neighborhood's character, livability, or development.

Building Codes

When you share housing, and particularly if you remodel, you may have to comply with building codes. Generally, residential buildings with multiple units have stricter safety and access requirements than single-family homes. For example, multifamily housing may require increased fire safety mechanisms, such as sprinklers and access roads, and swimming pools in multifamily housing are more carefully inspected and regulated than pools at private homes. Sometimes, stricter building codes are triggered when you expand your home. Building laws vary from city to city, but most derive from a uniform set of laws. If you are building a shared housing project from the ground up, your contractor and architect should know the rules.

Planned Community  Restrictions

Common interest developments (CIDs) are planned communities comprised of individually owned houses or condominiums, along with commonly owned areas, such as streets, a swimming pool, or a golf course. When these communities are created, a set of covenants, conditions, and restrictions ("CC&Rs") are developed, which residents must  follow. The intent of the rules is, in part, to preserve the character of the community and protect property values for all owners. Typically, a property owners association has the right to make more rules and enforce them. Even when you own your home, you could still be subject to use restrictions that could limit your shared housing options, such as rules about how many people can live in a home and whether and how houses may be remodeled.

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