Why should unmarried couples and domestic partners worry about real estate co-ownership issues?
Like a marriage, every domestic partnership or other non-marital relationship ends with either separation or death. If it ends with separation, the former partners may not remain friendly. If it ends with death, the surviving partner may not be friendly with the deceased partner's heirs. Either way, there may be a property dispute. Non-marital relationships are unlike marriages in that there is no well-developed body of law to govern property rights following separation or death. Resolving property disputes based on non-marital relationships can be expensive, time-consuming and personally destructive. In addition, both the beginning and the end of an unmarried couple's relationship can have gift, estate, income and property tax consequences that can be minimized or even eliminated with planning.
For these reasons, every unmarried couple, whether registered as domestic partners or not, should consider having a property agreement if they own real estate together, or if either party owns real estate individually. As described below, a co-ownership agreement is particularly important when the couple shares a home that is owned by one of them. In these cases, ongoing contributions to the home are typically difficult to trace and can form the basis for a claim of joint ownership or shared rights. An agreement is also important when one partner has contributed a larger share of a down payment for a co-owned property and/or plans to contribute a larger share for mortgage payments, recurring ownership expenses, or improvements. Absent a co-ownership agreement or other documentation, one partner's excess contribution to a down payment or other costs may be considered a taxable gift creating an obligation to pay gift tax.
What is a registered domestic partnership and which couples are eligible to register as domestic partners?
A domestic partnership is a legal status that is created when committed life partners register their relationship with a state or local government that recognizes domestic partnerships. The consequences of domestic partner registration vary by state and, in many cases, the full legal effect of state registration is not yet known. This article will attempt to highlight potential differences between registered and unregistered couples that relate to real estate co-ownership, with particular emphasis on California law.
California state-registered domestic partnership is available for all same-sex partners 18 and over, and for opposite-sex partners if one member is over 62. Under California law, state-registered domestic partners have the same rights, protections, and benefits, and are subject to the same responsibilities, obligations, and duties, as married people. For example, the earnings and assets of each partner are presumed to be community property to be equally shared during the relationship and equally divided if the relationship ends. Similarly, each partner is responsible for all debts incurred by the other during the relationship. Note that this equal treatment does not extend to federal law, which continues to deprive domestic partners of many of the benefits of marriage, particularly tax benefits.
What are the most important factors in determining how unmarried couples’ and domestic partners’ property will be treated upon separation, divorce or death?
There are five key issues that determine how real estate owned by unmarried couples and domestic partners will be treated upon separation, divorce or death:
- Whether or not the parties are registered domestic partners and, if they are, where and when they registered;
- When the property was acquired in relation to when the relationship began (and, in the case of registered partners, when the partners registered);
- Who paid for the property, and who contributed to its operation and upkeep;
- How title to the property is held; and
- Whether or not the parties have a written agreement or, in the case of death, whether the deceased partner had a will.
Is it safe to assume that property owned individually by one party will not be affected by the relationship?
No. Even if only one party is shown on the property title, the existence or subsequent creation of a domestic relationship involving that party, especially one that involves cohabitation, can make the property subject to claims by a romantic partner in a separation, and can affect how the property is treated if the party on title, or the other member of the couple, dies. This is true whether or not the parties are registered domestic partners, but is more likely to be an issue for registered partners. Moreover, in some states, including California, a state-registered domestic partner is responsible to repay debts incurred during the relationship by the other partner, meaning that one partner’s creditors can go after the other partner’s assets.
Is it safe to assume that property acquired before the relationship began will not be affected by the relationship?
No. Although property acquired before the relationship began is presumed to be separately owned, there are a variety of legal arguments that can overcome this presumption. This is true whether or not the parties are registered domestic partners, but is more likely to be a problem for registered partners.
What facts support a claim of joint ownership of property held individually and/or acquired before the relationship began?
When the parties are registered domestic partners and have no written agreement, property owned by one partner will be considered separate only if acquired before registration, or if paid for entirely with funds acquired before registration. Even under these circumstances, the other partner can make a community property claim based on:
- Contributions: Even though one partner paid to acquire the property, the other partner has contributed funds for mortgage payments, carrying costs, or improvements;
- Usage: Both partners use the property regularly and treat it as if it was jointly owned;
- Promises: One partner orally promises the other a share in the property;
- Behavior: The partners pool earnings, use joint accounts, regularly purchase together, and share much of what they own;
- Services: One partner performs domestic services or the other such as housekeeping, cooking, or home maintenance, or contributes work to improvement of the property; and
- Sacrifice: One partner relinquishes career or investment opportunities in order to contribute to the relationship.
To the extent the home is community property, ownership is deemed to be 50/50 regardless of who paid for what.
For unmarried couples who are not registered domestic partners, it is more difficult for one party to claim an interest in property held by the other individually and/or acquired by the other before the relationship began. But such claims, based on the same behaviors listed above, are increasingly common, and many are successful.
How can one ensure that individually-owned property is not affected by a domestic partnership or unmarried couple relationship?
The best was to make sure that property does not become subject to a claim following separation or death is to have a written agreement between the romantic partners specifically addressing the property. In the case of registered domestic partners, such an agreement will not be valid unless it meets certain legal requirements (as described below).
What is “title” to real estate and how does real estate title affect unmarried couples and domestic partners?
“Title” is a legal term for ownership. Real estate can be owned in a variety of ways, and the way a particular property is owned is shown on the property deed and in the official records of the county where the property is located. Title has a major impact on what happens to the property when an owner dies and how the property is divided if an owners separates from his/her romantic partner. But while the manner of holding title is important, it is not always the final determinant of how the law will treat the property in the case of death, separation or dispute. Registration as domestic partners, the existence of a written agreement, unwritten promises, and even the parties’ behavior, can all override the deed and/or alter how the law interprets the deed.
How do unmarried couples and domestic partners typically hold title when they co-own real estate?
The most common ways for unmarried couples and domestic partners to hold title to co-owned real estate are as:
- Joint Tenants;
- Tenants in Common;
- Community Property; and
- Community Property With A Right Of Survivorship.
As discussed below, some of these methods of ownership are not available to every couple.
Explain specifically how each method of holding title affects what happens following death or separation.
- Joint Tenants:
- Consequences of Death of a Joint Tenant: Couples that own as joint tenants have a "right of survivorship", meaning that if one owner dies, the other automatically becomes owner of the deceased owner's share. The passage of the deceased owner's interest to the other owner does not require a will or other estate planning document, and does not involve a probate court proceeding. For this reason, holding title as joint tenants provides the least expensive, fastest, and most definitive manner of passing property between co-owners upon death. The automatic right of survivorship cannot be overcome by a will, meaning that the deceased owner’s share will go to the other joint tenant even if the deceased party had a will stating otherwise. However, in general, either partner can destroy the right of survivorship by recording a new deed even if he/she is the only one who signed the new deed; the only time this is not possible is where the parties are registered domestic partners in a jurisdiction that requires agreement of both parties to destroy the automatic right of survivorship.
- Consequences of Separation of Joint Tenants: Joint tenants must hold property in equal shares. If they separate and there is no written agreement, the law presumes that each is entitled to half the property, and that all ownership obligations were also equally shared. This means that if one owner has paid more than half of some past expense, or receive less than half of some past income or other benefit, he/she can recover the loss from the other party’s share. If there is a valid agreement, its content will completely override the presumption of equality. But note that agreements among registered domestic partners (and spouses) are scrutinized much more closely than other unmarried couples agreements, and are frequently found to be invalid.
- Tenants In Common:
- Consequences of Death of a Tenant In Common: Couples that own as tenants in common do not have the right of survivorship, meaning that upon death each owner's interest passes by will or, if there is no will, to the deceased owner's legal heir(s). In California, a state-registered domestic partner’s legal heir would be his/her partner, but this is not necessarily the case in other states, or in the case of California domestic partners who are only registered with a local (e.g. city) government. Unless they are state-registered domestic partners living in a state that follows the California rule, it is important for couples who co-own as tenants in common, and who wish to have their property pass to the surviving partner, to make sure that each partner has a will leaving the property to the other. When a tenant in common owner dies, with or without a will, and regardless of state-registration, his/her interest must go through a probate court procedure that involves delay and cost, and can provide an opportunity for relatives to contest a will or argue about succession.
- Consequences of Separation of Tenants In Common: Tenants in common may hold title in unequal shares provided the deed states the ownership percentages. If the deed says nothing about the percentages, the ownership is presumed to be equal. As with joint tenancy, if there is no written agreement and one owner has paid more than his/her percentage of some past expense, or received less than his/her percentage of some past income or other benefit, he/she can recover the loss from the other party’s share. If there is a valid agreement, its content will completely override the percentages on the deed.
- Community Property Without Survivorship:
- Consequences of Death of a Domestic Partner or Spouse: Each partner can leave (by will) up to half of his/her community property to someone besides the other partner. Any portion not willed, or the entire property if there was no will, passes to the surviving partner. All property held as Community Property Without Survivorship must go through a probate court procedure regardless of whether the deceased partner had a will, and regardless of whether the property is passing to the surviving partner. (For this reason, Community Property With Survivorship is a better option except where one wants a portion of the property to pass to someone other than his/her partner.)
- Consequences of Separation of Domestic Partners or Spouses: Community property is deemed to be equally owned. But unlike with other forms of equal ownership, an owner has paid more than half of some past expense, or received less than half of some past income or other benefit, cannot recover the loss from other party’s share. A valid agreement can override the presumption of equality, but agreements among registered domestic partners and spouses are closely scrutinized and frequently found to be invalid.
- Community Property With Survivorship:
- Consequences of Death of a Domestic Partner or Spouse: CPRS is similar to joint tenancy in that a deceased partner's share immediately passes to the surviving partner without probate costs or delays. CPRS may also provide more advantageous tax treatment than joint tenancy for the surviving partner. At present, since state-registered domestic partnerships are not recognized by the IRS, partners owning their home in CPRS will not receive the same federal tax benefits as spouses, with the result that their federal tax treatment will be the same as if they owned in joint tenancy. Still, even today, partners owning their home in CPRS may receive better state income tax treatment (depending on the state). Couples wishing to hold title as CPRS must specifically so state on the deed. If the deed says community property but does not mention the right of survivorship, the presumption will be that the property is held as Community Property Without Survivorship rather than CPRS.
- Consequences of Separation of Domestic Partners or Spouses:Treatment of property held as CPRS following separation is exactly the same as treatment of property held as with Community Property Without Survivorship.
Which methods of holding title are possible for unmarried couples that are not registered domestic partners?
Unmarried couples that are not registered domestic partners can own as joints tenants or tenants in common, but cannot hold title as community property. Property can also be held individually by either party, but one should not assume that holding title that way insulates the property from joint ownership claims by a romantic partner. The method of holding title can be changed at any time by recording a new deed, but transferring all or a portion of the property between the parties will have tax consequences (as discussed below).
Which methods of holding title are possible for registered domestic partners?
The possible ways that registered domestic partners can hold title to real estate varies depending on where the partners are registered and where the property is located. In California, state-registered domestic partners can own in any of the ways discussed above (including individually in the name of just one partner), but the law presumes that all real estate acquired by either of them during the relationship is community property. If the property was acquired before registration, the title (including individual ownership) will be respected unless there are facts that support a claim that it should be changed (as listed above). If the property was acquired after registration, and title is held in the name of only one of the domestic partners, or by both partners as joint tenants or tenants in common, the title will be ignored and the property will be treated as Community Property Without Survivorship. The only sure way to prevent community property treatment is to have a valid written co-ownership agreement that meets the legal requirements for agreement among domestic partners.
What are the legal requirements for property agreements between registered domestic partners?
The special legal requirements for property agreements between registered domestic partners depend on whether the agreement was signed before or after registration. Pre-registration agreements must meet the following requirements.
- Full Disclosure: Each party must fully disclose all of his/her assets and liabilities to the other. The safest way to satisfy this requirement is to have a list of both parties’ assets and liabilities attached as an exhibit to the agreement. A statement in the agreement that there has been full disclosure is better than nothing, but is still vulnerable to legal challenge.
- Voluntary: Each party must be able to show that the other entered into the agreement voluntarily, and without being subjected to fraud, duress or undue influence. This easiest way to satisfy this requirement is for each party to be represented by independent legal counsel. If this is not the case, the unrepresented party must: (i) Sign the agreement at least seven days after receiving the final draft; (ii) Sign a separate document declaring that he/she was fully informed of the terms and basic effect of the agreement as well as the rights and obligations he/she was giving up by signing, and was proficient in the language in which the explanation was provided and in which the agreement was written; the document also must identify the person who provided the information; and (iii) Sign a separate document acknowledging that he/she was advised to seek independent legal counsel and expressly waived representation.
For post-registration property agreements between registered domestic partners, the above requirements are applied even more rigorously. A list of assets and liabilities must be attached as an exhibit to the agreement, and the seven days before signing will generally be considered too short. Also, even if all the disclosure and voluntariness requirements are satisfied, the agreement can still be ignored if a court finds it to be unfair.
What are the major issues that should be covered in a property agreement for unmarried couples or domestic partners?
Here is are the five most important points to cover in a property agreement among unmarried couples or domestic partners.
- Expenses: Specify each party’s past contributions as well as each party’s obligation to contribute to future costs, including acquisition costs (down payment and closing costs), carrying costs (mortgage payments, property taxes, insurance, utilities and minor repairs), and improvement costs (major repairs and enhancements). For each of these categories, allocate decision-making and payment responsibility.
- Forced Sale: Since it is unlikely the couple will want to continue co-ownership following separation, either partner should be permitted to force a buyout or sale. If this is not the arrangement, the agreement must describe each partner's rights and responsibilities following separation.
- Sale Proceeds: Clearly allocate rights to sale proceeds even if the property is separately held. The allocation also determines price if one partner buys out the other based upon an appraised value.
- Death: Disputes with a deceased partner's heirs are common, so clarify postmortem intentions even when property is separately held. If either partner might end up co-owning the property with the other partner's heirs, allocate rights and duties between the surviving partner and the heirs, and provide for a forced buyout or sale in case the co-ownership does not work out.
- Occupancy: Decide who can occupy any shared dwelling during the relationship. Consider whether guests should be allowed without both parties’ consent, and if so, how long they are permitted to stay. If each co-owner does not have the right to force a sale at any time, it is also necessary to explain how occupancy will work following a separation. It is generally advisable to ensure that a surviving partner can continue to occupy the shared home for a reasonable recovery period following the death.
How do most unmarried couples handle financial contributions to shared homes?
There are infinite ways to structure a property agreement. The examples below illustrate some common patterns. Keep in mind that elements can be mixed and matched to create a hybrid structure that fits the circumstances. Also remember that the primary purpose of an agreement is to avoid disputes upon separation or death, not to dictate behavior during the relationship. One need not rigidly adhere to the costs-sharing "rules" of the agreement so long as checkbook records, together with the agreement, provide the basis for a retrospective accounting.
- Individual Ownership:This arrangement is common where one partner owns the property before the relationship, or purchases it with separate funds and wants to maintain complete ownership and control. The owning partner holds title and controls sale rights, sale proceeds, succession upon death, and tax deductions. Funds contributed by the non-owning partner to carrying and improvement costs are considered "rent" payments that do not create ownership rights.
- Equal Ownership: This arrangement is common among partners with similar financial strength. Acquisition, carrying and improvement costs, and tax deductions, are shared equally. Either partner may trigger a buyout or sale and proceeds are distributed equally.
- Equal Ownership With Loan: This arrangement is the most popular approach where one partner has greater savings and/or income, but the partners wish to equally distribute ownership risks and benefits. Partner A loans Partner B any amount needed for Partner B to make an equal contribution to acquisition, carrying and improvement costs. The loan can bear interest (or not), be secured by Partner B's share of the property, and be payable during ownership or upon buyout or sale. Sale proceeds are distributed equally except for any amount that Partner B owes Partner A. Tax deduction allocation is determined by agreement. Partner B may also deduct any interest paid to Partner A.
- Proportional Ownership: This arrangement is common where one partner has greater savings and income, and the partners wish to distribute ownership risks and benefits based on financial contributions. Acquisition and improvement costs are shared proportionately. For carrying costs, each partner contributes a preset "rent" payment, and amounts over the "rent" payment are shared proportionately. Sale proceeds are distributed proportionately. Succession following death, and tax deduction allocation, are determined by agreement.
- Capital Accounts: This arrangement can be used where partners' relative contributions to the property will vary over time and they wish to distribute the risks and benefits of ownership in proportion to their cumulative contributions. Some or all of each partner's contributions to acquisition, carrying and improvement costs becomes that partner's "capital account". It is obviously important (and often challenging) to specify which contributions will count and which will not, and also to keep track of all the contributions. Sale proceeds are distributed in proportion to the balances of the capital accounts on the date of sale. Succession following death, and tax deduction allocation, are determined by agreement.
How do forced buyout and sale provisions work?
The property is valued based on one or more appraisals. Either partner may buy out the other (or his/her heirs) by paying the amount the "selling" partner would have received from a sale at appraised value. If neither partner buys, the property is marketed at appraised value, and if it does not sell within a preset offering period (typically 30-60 days), either partner may require a preset price reduction (typically 5-10%). The price reduction system is designed to prevent a partner who is less anxious to sell from insisting on an unrealistic price. Following each price reduction, the partners have another buyout opportunity. If both partners want to buy, the deadlock is resolved through an auction-like procedure.
What if a partner contributes services to the property?
Where one partner plans to perform major repair or improvement work on the property, the agreement should describe how the work will affect buyout or sale proceeds. It is simplest, and least likely to lead to a dispute, if the partners attach a fixed value to the labor before it is done, rather than giving credit for time spent and material costs. This approach avoids disputes regarding the length and quality of time contributed to the project, and expenditures on wasted materials. The fixed value can then be considered a loan, loan repayment, or capital contribution depending on the ownership structure.
Are short and simple property agreements best?
Not necessarily. The only part of an agreement that matters is the "key clause", the provision that applies directly to the circumstances that force one party to consult the agreement. Unfortunately, one never knows what the "key clause" will be when the agreement is prepared. If the "key clause" is missing because the agreement is short and simple, the agreement will have turned out to be useless. As long as an agreement is thorough, and it is easy to find things within it, the agreement can never be too long . . . only too short.
Doesn’t creating a property agreement for romantic partners show that one partner does not really trust the other?
Planning for separation and death isn't romantic. But the process is easier if one remembers that an agreement is equally likely to help either partner, and thinks of it as something each partner is doing for the other. Also realize that the agreement has nothing to do with the partners’ life together, and can be ignored so long as the relationship continues. The pain of preparing the agreement lasts only a few hours. Then one can put it away and never look at it again.
When an unmarried couple gets married or registers as domestic partners, what should they do about their home(s) and other real estate?
When an unmarried couple marries or registers, the parties should inventory all of their assets (both co-owned and individually owned) and decide how they want each of the assets to be treated following death or separation. Once they decide on their intentions, they should determine whether retitling the assets, and/or creating or modifying property agreements, is necessary to accomplish those goals. Keep in mind that marrying or registering generally creates valuable death and tax benefits with regard to co-owned property, but realizing these benefits often requires retitling the property. On the other hand, if the couple wants to ensure that property remains separately owned, or remains co-owned as something other than community property, the existing co-ownership agreement may not meet the necessary legal formalities to be binding among registered domestic partners or spouses (as listed above).
How can one party add his/her partner to title, and what tax consequences should be considered?
From a procedural standpoint, adding someone to title is straightforward. One simply creates a deed conveying a percentage of the property to the recipient, and specifying the manner in which title to the now co-owned property will be held. Then, the original owner signs the deed in front of a notary public, and brings it to the county recorder’s office. If the parties are acting prudently, they enter into a written property agreement before recording the deed.
If the property has a mortgage, the parties should consider how the bank will react to the change in ownership. Most loans have a “due on sale” clause stating that no interest in the property can be transferred without the bank’s consent. Even though adding a romantic partner to title (with or without money changing hands) is not a sale, it is generally subject to this consent requirement (although some lenders do not apply the requirement when the new owner is a “family member”). Note that if the transfer occurs without the lender’s consent, the lender will have the right to demand immediate repayment of the entire balance of the loan (plus prepayment penalties) and, if it is not paid, the lender can foreclose.
Adding a romantic partner to title can also have the following tax consequences.
- Gift Tax: Depending on the arrangements between the parties, the share of the property transferred could be treated as a taxable gift. The giver of the gift is responsible to pay this tax, and it is based on a percentage of the value of what is given. In California, state-registered domestic partners do not pay any state gift tax when transferring property from one partner to the other, but this exemption does not extend to federal gift tax. A way to avoid paying gift tax is to create documentation under which a “sale” occurs, and this is even possible if no money changes hands.
- Income Tax: If the transfer between romantic partners is treated as a sale, income or capital gains tax may be payable even if no money changes hands. Here again, it is the original owner who pays. Whether there is tax depends on the terms of the “sale” as shown in a sale contract. Note that if there is no sale contract, tax authorities may choose to treat the transfer as either a sale or a gift, and will generally choose whichever will result in the highest tax. So, not having any documentation explaining the transfer is the worst possible option.
- Transfer Tax: Most counties impose a tax on a partial ownership transfer when the deed is recorded, and will refuse to record the deed if the tax is not paid. The amount of the tax is based on the type of transfer, the value of the property share transferred, and the amount of debt secured by the property. Transfers between state-registered domestic partners are exempt from transfer tax in California.
- Property Tax: In many places, transferring partial ownership will trigger a property tax reassessment. The amount of the resulting property tax increase depends on the type of transfer, the amount paid for the partial interest (unless it is a gift), and the value of the property share transferred. Transfers between state-registered domestic partners are exempt from property tax reassessment in California.
Can sellers discriminate against unmarried couples?
Discrimination against unmarried couples is prohibited in California, but allowed in some other jurisdictions. Federal law prohibiting housing discrimination based on "family status" has been held inapplicable to unmarried couples. (There have been several unsuccessful legislative attempts to broaden this law to include gay (but not straight) couples.) Federal law does prohibit discrimination against unmarried couples in credit transactions related to home purchases. Of the 47 states that have housing discrimination laws applicable to sellers, 21 prohibit discrimination based on "marital status", but only four of these laws (including California’s) have been held to include unmarried couples.
ABOUT THE AUTHOR
Sirkin & Associates has focused on real estate co-ownership since 1985, and has been involved in the creation of more than 5,000 co-ownership arrangements throughout the United States and the world. This breadth of experience allows us to draw on a huge library of original documents, which speeds the drafting processing and lowers client costs. Our co-ownership documents continue to be the ones other firms emulate, and Realtors, lenders and buyers strongly prefer. This leadership results from constant improvement and innovation that makes our documents easier to read and understand, as well as more efficient and less expensive to enforce.
D. Andrew Sirkin is a recognized expert in shared property arrangements. He has worked on homes all over the world, including most U.S. States, as well as Italy, France, Spain, Portugal, Ireland, Argentina, Nicaragua, Costa Rica, Panama, Dominican Republic, Nicaragua, Belize and Mexico. He is an accredited instructor with the California Department of Real Estate, the co-author of ten editions of The Condominium Bluebook, published by Piedmont Press, and the author of The Equity Sharing Manual, first published by John Wiley and Sons in November 1994. Andy can be contacted via email at [email protected], or by phone at 1-415-738-8545 (US) or 33-1-7666-0202 (EU).