Q: Because my wife and I cannot afford the down payment on our first residence by ourselves, her father has offered to provide 100% of the down payment so long as he is a co-owner of the property and can share in any appreciation in value of the property, and we make all of the mortgage payments. What options do we have in specifying how the grant deed to the property should be prepared to provide my father-in-law with a recorded interest?
A: Ownership by more than one person is referred to as co-ownership, co-tenancy, or concurrent ownership. There are four basic options for ownership of real property, and a selection depends upon the characteristics of each and the goals of the owners. They are tenancy in common, joint tenancy, partnership, and community property.
A tenancy in common is created if the deed conveying title specifies that the owners are “tenants in common.” If the deed does not specify the type of ownership, a tenancy in common is also created by operation of law. Any number of persons may own property as tenants in common, and their interests may be equal (e.g., 50% – 50%) or unequal (60% – 40%), but the interests must total 100%.
Tenants in common may acquire their interests at different times and from different sources, and they may sell or borrow against their interest without the knowledge or consent of the other owners. The main characteristic of this type of ownership is that there is no right to survivorship. Therefore, the ownership interest of a deceased tenant in common passes by testate (e.g., will or living trust) or intestate succession (without a will or trust), and not by operation of law to the surviving cotenants.
Unless they have agreed differently as specified in the deed transferring title, all tenants in common have equal rights to the ownership. They have equal rights of possession to the property, and neither may exclude the other from any part of the property, even if only one tenant is actually in possession of the property. In other words, if only one tenant actually resides on the property, that tenant cannot exclude other tenants even if they never reside on the property.
All rents and profits, including the appreciation of the property, are shared among the co-tenants in proportion to their undivided interests. This sharing also applies to any expenses (e.g., taxes and mortgages) and losses in value of the property.
Another common form of ownership is a joint tenancy that requires a single transfer that expressly declares that the form of ownership is a joint tenancy (e.g., “as joint tenants” or “in joint tenancy”). To create a joint tenancy, there must be four unities of time, title, interest (must be equal), and possession. The joint tenancy can only last as long as the four unities of title exist, and if one of the joint tenants conveys its interest, then the joint tenancy is severed and the remaining joint tenants hold their interests as tenants in common with the transferee.
The main benefit of holding title by joint tenancy is the right of survivorship that provides that upon the death of one of the joint tenants, the title of the deceased tenant automatically vests in the surviving tenants by operation of law, with no need for probate. Therefore, if the joint tenants want the deceased tenant’s interest to pass automatically to the other tenant (e.g., husband to wife, or parent to child), a joint tenancy should be used. If the joint tenants want to be able to bequeath the interest by will or trust to another (e.g., husband wants to leave his share to his son by an earlier marriage), then a joint tenancy should not be used.
If the persons are investing in the property as a business proposition, then a form of ownership they could use is a partnership. A partnership is an association of two or more persons to carry on a business for profit, and the real property is owned by the partnership and not by the partners individually. The property can only be conveyed in the name of the partnership, and the partners can only use or possess the partnership property on behalf of the partnership.
The fourth form of ownership in California is community property, which is typically property acquired by a married person or registered domestic partner during the marriage or domestic partnership while he/she is domiciled in California. There is a general presumption in California’s family law statutes that all property acquired during marriage is community property, and a written agreement (e.g., pre-nuptial or post-nuptial agreement) is typically used to defeat the presumption and make the interest separate property.
Regardless of the type of co-ownership, each of the owners typically have an equal right to the possession, use and benefit of the entire property. One of the misunderstandings of some owners is that they can divide the property into separate parcels by defining the percentage of ownership in the title. But when property is owned by co-owners, the ownership is to the entire property in the percentages of ownership specified (e.g., Joe as to 70% and Jane as to 30%), or equal shares if no percentages are specified. One cotenant has no right, absent an action for partition, to force another cotenant to change the boundaries of the possessory interest.
Based upon the question, it appears that the father wants to realize for himself any profit from his investment in the property. What is uncertain is whether the father wants to be able to bequeath his interest to others such as his wife or other children by a will or trust, or whether he wants to have his interest in the property automatically pass to the husband and wife who also have an interest in the property. It is also uncertain from the question whether the father wants a greater share of interest because he is contributing the downpayment, or whether he is willing to have an equal share based upon his daughter and her husband making all of the mortgage payments.
Depending upon the response to these questions, title may be held as tenants in common (no right of survivorship and unequal interests) or joint tenancy (right of survivorship and equal interests). In any event, as to the husband and wife, whatever interest they may hold in the property will be presumed to be community property between themselves unless they enter into a separate property agreement regarding their interest. The ownership of real property can be complicated and the form of ownership should be carefully considered based upon the unique characteristics of each type and the interests the parties want to create.
The opinions expressed in this article are those of the author, and they do not create an attorney-client relationship or constitute legal advice. Individual circumstances may vary and professional advice is recommended before making any decisions concerning legal matters.
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