Aug 5, 2021

Community Property Versus Tenants In Common

Most married couples own their homes as Community Property.  That means if one dies, the other inherits 100% of the property automatically generally with no tax implications.  Tenants In Common is used when two people buy a property together based on the percentage of down payment each has contributed.  So, if each person puts 50% down, they each person owns 50% of the property.  If one dies, the percentage of ownership goes to that person's heirs not the other partner.  This also means that both partners are on the mortgage application and both must qualify for the mortgage.  

The Community Property designation is very straight forward.  The remaining person gets the property in the event to death.  It is Tenants In Common that probably requires a separate operating agreement to deal with the What If's.  What if one of the owners wants out of the deal.  One of two things would have to happen.  Either the home would have to be sold and the proceeds distributed to both owners, or the other partner would have to buy out the other owner, which probably means refinancing the loan.  Death of a partner could be more complicated because the ownership position could be left to his or her heirs.  That means that now the remaining partner will own the home with other people.  

In all likelihood, once again the partner would have to buy out the heirs, one way or another, or sell the property to distribute the proceeds to all owners.  If the property was bought as an investment, there probably should be a time window that requires a sale to say either the earlier of the partner's agreeing to sell the home, or perhaps ten years, which ever comes first.  

In any case, if a property is purchased as Tenants in Common, there does need to be an operating agreement to deal with the What If's.  It may be that an attorney should help in drafting this document to make sure both partners are clear as to eventualities.