Homeownership is a big step to take with another person, even with a beloved family member. Unforeseen complications can quickly arise, so it is best to know what you are getting into before signing on the dotted line.
Whether you accidentally disinherit your children or cause your brother to pay capital gains taxes, the stakes are high. Hurt feelings are a likely outcome without first taking into consideration the legal aspects of the situation.
Let’s look at the possible negative consequences of owning a home jointly with someone else.
Capital Gains Income Tax
When a child or spouse inherits a home through probate court, a trust, or a transfer on death decree, they get a step-up in basis. Jointly owning a home means that there is no step-up in value. If a co-owner sells jointly owned property, they will pay capital gains taxes on the increase in value.
If your house was $180,000 when purchased in 1979 and it is now worth $220,000, an heir does not pay income tax on this increase in value. This step-up in basis is a crucial benefit for a child who can’t afford to pay for your home’s decades of appreciation.
If your child owns the home jointly with you, they will pay capital gains taxes on the increase if you decide to sell the house together or if you pass away. An income tax bill of $40,000 the year that you pass away is not in their plans.
The only exception to the capital gains taxes for selling a jointly owned home is a spouse who sells within the two years after your death.
If your joint owner has a financial problem that you don’t know about, you could lose your homeownership. A beloved child who runs up credit card debt or has a gambling problem behind the scenes could cost you your home. Even a construction lien that comes about due to a property dispute could be a significant problem.
If your co-owner doesn’t pay income taxes, the IRS can place a tax lien. If your joint owner files for bankruptcy because they have too many bills and not enough income, you lose your share of the home to their financial problems.
Anytime a creditor places a lien on a home, they have an ownership interest. If the lienholder sues and wins for damages, you must either pay your co-owner’s debt to keep your home or lose your home. Stories abound where a parent decided to own a home with a child but lost their equity to a grown child’s irresponsibility.
Owning Property with a Subsequent Spouse
Owning property with a spouse is often a good idea, but sometimes there are unforeseen consequences. For example, let’s say you have two grown children and marry a new wife. You own a beautiful home together as joint owners, and you pass away.
She inherits the home, remarries, and now owns jointly with her new husband. They name their children together as heirs. Your grown children inherit nothing.
Your Will is Not The Last Word
Often, when we jointly own a home, we mistakenly believe that we can write a will that legally forces others to do what we desire. However, a will has no power if you own a home jointly with someone else.
The will does not have the power to make the joint owner honor your wishes. If you own a home jointly with your husband, you can state in your will that when he dies, he should give equal shares to your three children together.
However, if he remarries and decides to own jointly with his new spouse, he can leave the entire home to her when he passes away. She most likely won’t care what you intended 15 years before and can continue living in and owning the home.
Selling Your Home
If you want to sell your home but your co-owner does not, you have no recourse other than taking them to court or a binding mediation. Since you do not solely own the property, you can’t decide to sell without agreement from the co-owner.
Selling With a Child
If you fall ill and no longer have a job, a child who owns a home with you may not want to pay your portion of the mortgage each month. Before owning with a child, consider what will happen if either of you becomes unable to contribute your share.
What if you decide you’d like to use your equity and move into a continuing care retirement community. You are looking ahead to taking care of yourself in the future. 70% of Americans aged 65 and older will need long-term care. Or you may want to sell your property and put your equity into an irrevocable trust so that you can qualify for Medicaid down the road. But what if your child has other financial needs and refuses to agree? Do you want to drag your grown child into court to force a sale?
Selling With a Spouse
If you and a spouse separate, the spouse who leaves cannot force the spouse who stays to sell the home without a long and drawn-out court battle.
It gets complicated if you are going through a divorce and decide you want to sell your home. In a divorce, one spouse will often buy out the other spouse’s share of the house, but if neither of you has the means to do so, a judge might rule the home sold.
These days, many choose to live with an unmarried partner. If you buy and place a home in joint tenancy with an unmarried partner, the jointly owned home is considered a gift to your partner. Your partner will owe taxes on this gift income.
Refinancing with a Co-Owner
What if interest rates are at an all-time low and you want in on the possibilities for a lower monthly payment, but your co-owner does not agree? You are out of luck if you can’t convince the co-owner of the benefits. Any refinance on a home must be approved by all owners. There is no easy way to choose to refinance unilaterally. It is a mutual decision that all parties involved must make together.
A refinance also takes into consideration the employment history and debt-to-income ratio of both owners. What if your co-owner lost their job, and that is the reason you both need the refinance? You may not even qualify for the refinance package you so desire because of the job loss. A co-owner can bring your qualifications down so that you receive a refusal from a mortgage company.
Accidents and Illness
Suppose your co-owner becomes incompetent or incapacitated through an accident or illness, and you need to make decisions regarding the home. In that case, you do not have the legal power to do so unless they have made you their durable power of attorney.
If you don’t possess a durable power of attorney, you will need to go to court and prove their incompetence or incapacity so that the judge will name a guardian for them. At that point, you must negotiate with the co-owner’s guardian for any decisions you make regarding the home.
Let’s say you own a home with your step-child from your marriage, but they have a stroke and need around-the-clock care. You can’t afford to own the house on your own, so you petition the court for a guardian so that the guardian can sign off on the sale of the home.
However, the court declares the step-child’s mother as the guardian. This is your deceased spouse’s first wife who doesn’t like you and has always been jealous of your relationship with her child, whom you raised. You can see how she could cause trouble for you trying to sell the home.
Find the Help You Need
You can see how joint ownership causes a myriad of problems for both parties involved. It is best to think through the issues with an experienced real estate attorney who can help you see all angles of choosing this route. A qualified attorney will know which laws apply to your particular situation and how to enact legal frameworks and documents to protect your interests before deciding to own a home with another.
Contact us at Jarrett Law with any questions regarding disputes or difficulties owning a home with another. We are here to help and would love to hear from you.
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