The prices of properties are at all-time highs across the country, and that is leading some home buyers to get creative when it comes to buying income or vacation homes. Co-ownership with others is one way people are making it affordable. Georgia Swan, Tax and Estate Planner with TD Wealth, talks with Kim Parlee about what you need to be aware of if you decide to undergo a real estate joint venture.
Here to talk about the things you need to think about before you enter these kinds of agreements, somebody very smart, Georgia Swan, tax and estate planner at TD Wealth. She joins us from lovely Barrie, Ontario. Georgia, I can't wait to see you, again, in person. It'll happen soon, I know, but for now, nice to see you this way.
- Yes, good to see you, too, Kim.
- Let's start with some of the basics. And if you decide to buy a property with one or more than one other person, how is it different than buying it on your own? And I know you kind of have split this up in different parts, but title, it's like the structure of the agreement. What does that mean?
- Mhm. So I think most people are familiar with the two different types of real estate ownership. The most common one that, I think, a lot of people know about is this idea of joint tenancy with a right of survivorship, or joint with a right of survivorship. I call that one kind of the last man standing option, and it's the idea that everybody that owns the property, whether it's two people or more than two people, have the right to use it and enjoy it, while they're alive. But they don't have the right to deal independently with a share of the property.
And basically, what happens, if one of them dies, then the surviving owners inherit the entire property or end up with the entire property. And that's why I call it the last man standing, because basically, whoever it is that survives the longest is the one that gets the whole property.
The other option is something called tenants in common. Some people might be a little less familiar with that one, but that one is-- it takes place when each person that owns the property-- so it can be two, it can be more than two-- has a divided interest. Now, in the absence of actually dictating what that percentage interest is, it falls to basically equal.
So if it's two people owning it and there's no delineation that one person owns 40%, the other owns the other 60%, it basically defaults to 50-50. But in tenants and common ownership, you can deal with the property independently. So, for example, one owner could leave their share in a will to their spouse or to their children. They could conceivably mortgage their proportionate share.
They could, if they could find a buyer for it, actually sell their share. So that's the most important distinction between those two types. But that's a real estate issue. And you have to be careful. I mean, a real estate law issue.
You have to be very careful that each of those different types of ownership carries with it different family law considerations, different potential tax considerations, different creditor considerations in certain cases, and especially in family law, you have to be very careful. Because if that property is a matrimonial home, some provinces have family law legislation, which will actually affect the title if one of the spouses owns the house with somebody other than their spouse. So it's really important to get proper advice across all those areas of law for the province in which you live.
- Yeah, and it's always, I think, important to go into these things saying, here's what I would like it to look like, here's what I don't want it to look like, and how do we structure this, so those both things happen? Because some people may want to share a home with their friend, maybe not their friends' children later on down the line, which is a significant thing. OK, money standpoint, what do you need to think about? And I'm assuming this is how you pay for the property.
- Right. So, first and foremost, you have to get together with the people that you're buying this property with and decide who's going to pay for the down payment, how much is everybody going to put in? But beyond that, you also have to look at the day to day ways that this property is going to be managed. So in other words-- and it's somewhat from the ridiculous to the sublime, where you're sitting there saying, OK, who's going to be responsible for the maintenance? Who's going to be cutting the grass? Who's going to be responsible for cleaning the house?
We then get to concepts, like what about the day to day expenses, the utilities, and so forth? Are we going to split it up? Let's say, two parents buys the home with a child that has a five-person family? Do we split the utilities, in that case, according to the square footage of the granny suite versus the rest of the house? Do we split it equally? Do we split it according to the number of people that live in the house on a pro-rata basis? What does that look like?
And then by way of example, I'll give you a situation that I had once, where two families purchased a home. One family put in 65% of the down payment. The other family put in the rest, and then the mortgage payments on a go forward basis were actually shared equally.
The problem was, when this family-- because they hadn't spelled anything out beforehand of how this was going to work, when the families came to sell the house, there was a huge disagreement as to what the proper division of now that growth in the house was supposed to be.
Was it supposed to be according to the shares that they each contributed to the initial down payment? Was it supposed to be according to the amount of the mortgage that they each paid, which was roughly equal, or some other formula? So those practical, day to day financial considerations, as well as the broader financial considerations, if the property ever gets sold, need to be hammered out ahead of time.
- And you touched on a little bit of what I'll call some of the legal pitfalls. I mean, there's potential pitfalls all along this conversation, but also, some really good things that can happen too. I know people have done it quite successfully. What are some maybe things that people aren't thinking about that even you haven't brought up yet with the first two things to think about in terms of just even title and money?
- Yeah, I think you have to think about the future and what the relationship looks like down the line. So, for example, let's say, two siblings purchase a home together, a cottage, let's say, they purchase a home together, a cottage property together, but then one of the siblings dies. Does the surviving sibling want to actually own the cottage with their former brother or sister-in-law?
So those kinds of considerations, what happens if somebody dies? The other consideration, of course, is what happens, if one group of owners or one owner wants to sell, but the other one doesn't? What kind of mechanisms are going to be inserted into an agreement? Because that's basically what we're working up to, creating a co-ownership agreement.
Think of it like a prenup for owning property together. You know, what's to happen if somebody wants to sell? Is there a mechanism for the other party to buy out the party that wants to leave? And what's in place to, basically, deal with disputes?
Because the unfortunate reality is, if you don't have all this stuff spelled out, and one party wants to sell, the other one doesn't, you may have to avail yourself of legislation that exists in all the provinces, which is called partition legislation. It's actually partition and sale legislation, where a court will either say, if you can divide the property, divide it, which oftentimes is possible, or else the sale is going to be forced.
So estate planning, the legal issues of the relationship falling apart, the financial issues, the day to day maintenance, the day to day decisions that have to be made, all of that should be worked out.
- There's a lot here, and I could spend-- Georgia, I know people would love to hear a lot more on this. I'm just up against the clock. What are the best ways of addressing all of this, or just maybe the best practices in terms of are interested in doing this? What do you need to do?
- OK, first and foremost, choose your co-owners wisely. Make sure you have the type of relationship that's going to go the distance. Next, make sure you get really good legal advice and start early, start before you found that perfect property that you all want to buy.
So before you even get to looking, make sure that you know and you've mapped out what this relationship is going to look like. Get proper legal advice, get proper tax advice. Make sure you agree on the right real estate agent. And then make sure that you get that agreement drafted, signed, independent legal advice for all parties, and make sure that your wills, your powers of attorney, marriage contracts, and any other legal agreements that might affect that relationship or be affected by that co-ownership relationship also fall in line.
- That is a good advice for so many things, not just co-ownership. But great to talk to you, Georgia. Thanks so much.
- Thank you so much for having me back, Kim. I really, really like it.