How to buy a home with someone else
The majority of real estate in the USA is not owned by a single person, but rather by multiple people. This is true for both single-family homes and multi-family homes. It can make a lot of sense to buy a home with a partner. You can split the costs and expenses of the home, and you can share the responsibilities of homeownership. However, if not enough thought is put into the arrangement, it can also lead to a lot of headaches.
How does one actually own a home? ("hold title")
In order to understand how joint ownership works, it is first important to understand how title works.
When you buy a home, you are essentially buying the "title" to the property. This is a legal concept that allows you to own the property and have certain rights to it. The way this is typically represented is through a deed. A deed is a legal document that transfers ownership of the property from the seller to the buyer.
A few ways one can legally hold title to a property:
- Sole Ownership
- Tenancy in Common
- Joint Tenancy
- Tenancy by the Entirety
Sole Ownership
The most simple way to hold title to a property is by yourself. This is the default state for any property that is not held in any other way. If you buy a home by yourself, and hold it in your name alone, you own the property as a sole owner. In addition, if you purchase the home with an entity, such as a Limited Liability Company (LLC), you own the property as a sole owner through that entity.
Tenancy in Common
In tenancy in common, ownership is divided among two or more people, but without equal shares. Each owner has an undivided interest in the property, and can specify in their will who should receive their interest upon death.
Joint Tenancy
In joint tenancy, two or more people own the property equally. When one owner dies, the remaining owners automatically receive the deceased owner's interest in the property. This is a very powerful tool, as it ensures that the property will pass to the surviving owners automatically, avoiding the need for probate.
Tenancy by the Entirety
Tenancy by the entirety is a type of joint ownership that is only available to married couples. It is very similar to joint tenancy, but it is only available to married couples. If one spouse dies, the surviving spouse automatically receives the deceased spouse's interest in the property. The notable difference is in credit protection. If one spouse is sued, the other spouse's interest in the property is not at risk.
Individual vs Entity Ownership
Lets go one step deeper. When you buy a home, you can either buy it individually, or you can buy it through an entity. Note, if the property is owned by a single entity, even though there may be multiple people who are members of the entity, the property is solely owned by the entity. But also note, a property can be owned by multiple entities.
Individual Ownership
Typically, a residential home is owned by person(s) individually. This means that on the deed, it will list the property being owned by "John Doe" as the owner. The home belongs to John Doe, directly.
Entity Ownership
Instead of buying a home individually, you can have a legal entity (such as an LLC) own the property. This means that on the deed, it will list the property being owned by "ABC LLC." as the owner. The home belongs to ABC LLC, not the individual(s) who are members of the LLC.
Here are some of the legal entities that own real estate in the USA:
- LLC
- Corporation
- Partnership
- Trust
LLC
The most common type of entity used to own real estate is an LLC. When a home is owned by an LLC, the home purchaser does not own the property directly. Instead, the home belongs to the LLC, and the individual(s) who are members of the LLC own the property indirectly. The reason this is done is to protect the personal assets of the owners from lawsuits that may arise from the property. LLCs have a layer of liability protection, meaning that the personal assets of the owners are not at risk from the liabilities of the LLC.
If you plan to rent out the property, it is highly recommended that you form an LLC to own the property. This is because renting out a property can create a lot of liabilities for the owner, such as tenant-landlord disputes, property damage, and tenant evictions. If the property is owned by an LLC, the personal assets of the owners are protected from these liabilities.
Partnership
It is important to note that partnerships are not actually a legal entity, but rather are an association of people who come together to carry on a trade or business. Because they are not a separate legal entity, they do not provide the same liability protection as LLCs and corporations. If Jack and Jill purchase a home together, they are automatically a partnership by association, but they do not have a separate legal entity.
You can get an EIN together so that you can open a business bank account, but this does not create a separate legal entity.
Corporation
Corporations are similar to LLCs in that they also provide liability protection to the owners. However, there are some important differences between LLCs and corporations. For one, corporations are required to hold annual shareholder meetings and keep detailed minutes of those meetings. Corporations also have a higher administrative burden, as they are required to file annual reports with the state.
Corporations are not used as often to own residential real estate, as they are more commonly used for business purposes.
Trust
Trusts are a bit more complex. They are essentially a legal entity that owns property for the benefit of another person (the beneficiary). Trusts can be created for a variety of reasons, such as to avoid probate, to reduce taxes, or to target beneficiaries who may not be able to handle money directly.
Trusts can save a lot of family drama, as they can avoid the need for the heirs to go through probate. There will be no arguing over who gets what, as the trust dictates exactly how the property will be distributed.
What are typical arrangements for people buying a home? (Please consult a lawyer before making any decisions)
Buying a Primary Residence
Typically, when someone wants to purchase a home for their primary residence, they will purchase the home individually. This is the simplest way to own a home, and it provides the most flexibility.
If they are buying the home with their spouse, they will typically purchase the home as individuals, but own the home as tenants by the entirety (recorded on the deed as such).
If they are buying the home with a signficant other (but not married or in a domestic partnership), they will typically purchase the home as individuals, and own the home as tenants in common (recorded on the deed as such).
Buying a Rental Property
It almost always makes sense to purchase a rental property through an LLC. This provides liability protection, as the individual(s) will not become personally liable for the debts and liabilities of the LLC. In the operating agreement, they can specify how the profits and losses of the LLC will be split among the members (if there is more than one member).
LLCs can also provide a layer of privacy, as the financial details of the LLC are not as easily accessible to the public as the financial details of an individual. If there are tenant disputes, it is more difficult to discover the individual(s) behind the LLC.
Finally, LLCs can be held by individuals, and individuals can be members of multiple LLCs. This can be a powerful tool, allowing for flexibility in how ownership is structured.
Vacation Homes
Vacation homes don't have a one size fits all solution. It really depends on the individual(s) involved and the situation.
If buying a vacation home with family, it is often done through a trust. This allows for flexibility in how ownership is structured, and avoids the need for probate. This can also be a good way to avoid capital gains taxes at the owner's death. Most importantly, this helps a lot when a family may have disagreements over who gets the house when the parents pass away.
If buying the home with a significant other, it is often done as individuals, and they own the home as tenants in common.
It is important to note though, that if the vacation home is to be rented out, it is highly recommended that it be owned through an LLC. This provides liability protection, as the individual(s) will not become personally liable for the debts and liabilities of the LLC. In the operating agreement, they can specify how the profits and losses of the LLC will be split among the members (if there is more than one member).
Note, an LLC can be owned by a trust, and a trust can be the manager of the LLC. This is a very powerful combination, providing liability protection, privacy, and the ability to manage the LLC through the trust.