Holding Title – How Do You Own Your Property? Part II

As I mentioned last week, the way you hold title with real estate affects how the ownership of your property can be transferred and how the property can be financed, improved or used as collateral. All this can have significant tax implications. This week, I’ll talk about partnerships and tenants in common.

Remember, I am not an attorney or an accountant. Consult those professionals about how to hold title. This column is simply fodder for that conversation.

Simple Partnership

While formal agreements help keep legal matters well defined, less formal ways to hold title exist, one of which is a simple partnership.

This often happens when two friends spot an investment they can't afford alone. They pool resources for a larger down payment and better financing. However, there’s a downside: you now have a partner. This person may have been your BFF before you owned a property together, but when it comes time to contribute $25,000 for a new roof, your partner may have other priorities, like sending Junior to college. And be aware, each partner is personally liable for the other's actions. If your partner hires a roofer, you're on the hook.

Limited Partnership

Limited partnerships have two partner types: general partners, who carry significant liability, and limited partners, whose exposure is capped at their investment. As a limited partner, you're shielded from claims (provided you follow the rules and don't let anyone pierce the veil). Since the property's value backs the loan, limited partners carry relatively low risk.

These structures can include up to 35 partners who may never have even seen the property. At least one general partner is required; the rest are passive investors who review financials, collect tax benefits, and cash checks at year-end. The upside of limited partnerships is that you can be part of a group of people you don’t even know to raise large sums of money and reap the rewards of investment. The downside is that the extra bureaucracy required to manage so many people comes with a price tag.

Tenants in Common (TIC)

Tenants in common jointly own a property—often friends or associates sharing something like a duplex. No formal partnership agreement is required, though I strongly recommend one.

The TIC acronym also describes a larger investment structure: fractional shares in real estate that can be bought, sold, or traded, with a professional manager overseeing transactions. In the early 2000s, TICs in major properties like multimillion-dollar shopping malls became popular vehicles for exchanging small investment properties for a share of something much larger, without triggering capital gains tax. Corporations can participate too, thanks to corporate personhood. With the downturn in the market in 2007-08, these fell out of favor.

Next week, I’ll talk about holding title via a corporation. If you’re curious about how you’re holding title, title companies are happy to provide a free title profile. You can also call my office here in Ukiah to get one—no cost, no obligation.

If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

Dick Selzer is a real estate broker who has been in the business for more than 50 years. The opinions expressed here are his and do not necessarily represent his affiliated organizations.