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People often consider opportunities to jointly own property with family, friends and business associates, but fail to consider how to properly structure the ownership of the property in order to avoid issues that arise over the long-term investment in real property. These concerns arise in a variety of ownership situations, ranging from business associates acquiring property for a new factory to family and friends owning property for recreational purposes. For example, a group of siblings may contemplate owning commercial property together in order to receive income from the rents received from the property, but fail to consider what issues may arise with the ownership in the future once one of the siblings passes away or no longer wants to own an interest in the property. The heirs of the siblings may not have the same working relationship that the siblings had during their ownership. Without a working structure in place to address management issues, the heirs’ differences can lead to costly and time-consuming litigation. Addressing the structure of ownership at the beginning of the process can alleviate issues in the future and make for better relationships among family, friends and business associates.
Like most states, Pennsylvania law provides for different structures for the joint ownership of real property, with each providing its own benefits and drawbacks. The ownership can be structured with each individual owning an interest in the real estate directly or each individual owning an interest in an entity which holds title to the real estate. Types of ownership whereby each owner holds a direct ownership interest in the real property include tenants-in-common, joint tenants with right of survivorship and tenants-by-the-entireties.
Title to real estate can also be held by a variety of entities – a limited liability company, a partnership or a corporation – in which the individuals have an ownership interest. Additionally, individuals can form entities to hold their interest in a direct ownership structure (i.e., tenant-in-common) or to hold their interest in the entity holding title to the real property. Alternatively, the parties could consider a structure where one individual or entity holds title to the property and a long-term lease with other individuals for the use of the property. This type of structure would alleviate concerns over the purchase and maintenance of the property, including the avoidance of transfer taxes where one of the parties already owns the real property. The final structure for joint ownership can be complicated or simple depending on the goals of the persons and entities who are seeking to hold title to the real estate.
In determining the best structure for the joint ownership, the owners must determine what their priorities are for the joint ownership as this will direct the owners in selecting the correct structure to reach their goals. The type of structure selected will affect the use of the property, as well as financial and management issues, including:
- who has the right to make decisions regarding the use of the property;
- how income taxes are to be paid;
- the right to contributions for maintenance and expenses;
- how distributions of profits are made to the owners;
- what financing may be necessary for acquisition and/or development; and
- the transferability of interests in the property.
The goals of the owners will dictate which of these effects are most important to the owners. For example, a group of family members seeking to own land for purposes of a family vacation spot will have different challenges than a group of business associates purchasing land on which to erect a warehouse for their business. Failing to evaluate the options and impacts of the structure of the ownership at the time the real property is acquired can lead to unexpected and unwanted consequences in the future.
Additionally, while ownership of a property can be restructured when it becomes apparent that the selected structure may have unintended consequences, realty transfer taxes can make such action cost prohibitive. Of course, if the property is already owned jointly by parties, and the current structure does not work effectively for the owners or it is anticipated to create issues in the future, changing the ownership structure should be discussed with counsel as soon as it becomes apparent that a change may be needed.
It is essential that the parties carefully and with the advice of counsel review all options available for joint ownership of property, identify the owners’ goals for the ownership of the property and carefully select the best option to meet the parties’ goals while avoiding, as much as practicable, unintended consequences.
When determining the best form of ownership for real property, potential owners should consult their counsel and consider the following:
- What is the purpose of owning the property?
- What are the costs that may be incurred for maintenance of the property and how will these costs be paid or shared by the owners?
- What financing might be necessary for the acquisition or development of the real property and how will the structure impact the ability to obtain funding?
- Who will be making decisions regarding the management, maintenance, use, leasing, development, etc. of the property?
- What rights or restrictions do the owners want in transferring an interest (either in the property or the entity holding title to the property) during the owners’ lives or to heirs?
- How will the structure impact income taxes on monies earned from leasing the property and what are the financial and tax reporting requirements?
- What structure might provide the best ownership format if a future sale of the property may be expected?
- Would forgoing joint ownership for a sole owner with a lease be a better option to accomplish the goals of the parties and avoiding unintended consequences?
While all unintended consequences can never be completely eliminated, with careful planning, parties seeking to jointly own real property can develop an ownership structure which allows them to achieve their goals and avoid costly consequences.