Today's guest blog is courtesy of Kevin Hummel of McFerran & Burns
How Are You Vested?
My wife likes watching Project Runway; so I am sure she would take this question the wrong way. What I am asking here is “how do you appear on title?” So often, potential exchangers come in thinking that they have a partnership, simply because they both own the property together. That, in itself does not make a partnership. In order to have a partnership, you would need to create an entity, separate from you as individuals, and file a tax return for this entity.
There is certainly nothing wrong with individuals, siblings, married couples, or entities owning property together. Without an actual partnership, you call them tenants-in-common (T-I-C). The advantages are that each party can do what they would like when they sell. In other words, one could simply sell, while the other does an exchange.
When you do have this kind of arrangement, especially if family is involved, you really should have a Tenancy-In-Common Agreement in place. Like a Partnership Agreement, it would spell out the ratio of equity and debt of each party. It is so common for family members thinking that they are in agreement about these issues until they go to sell it. You might get a Preliminary Title Report that says that each party owns 50% interest, but after asking questions, it is discovered that one party contributed more cash and another provided more “sweat equity”, or one managed the property with the belief that it would provide them a higher percentage of ownership. By drafting a T-I-C Agreement as early as possible, you will avoid law fees and court appearances between parties who used to be close.
I might sound like I am repeating myself, but most of these discrepancies happen between family members, especially when parents are involved. You might have clear understanding between a father and son, but upon the death of a parent, you suddenly have other siblings or their spouses asking about their cut of the sale. The more clearly this is spelled out in the TIC Agreement, the less chance of this becoming a family dispute.
Terms of a T-I-C Agreement:
The IRS provided guidelines for the use of this agreement in Rev. Proc. 2002-22 to clarify that it is not operating as a partnership. This is why any kind of partnership or business entity agreement should be drafted by a real estate attorney.