July 14th 2020
If you are considering investing in real estate with another person, it is important to set out the ground rules in advance of your purchase. A co-ownership agreement is a common way for parties to identify their respective rights and obligations. The purpose of the co-ownership agreement will vary depending on whether one or more of the owners intend to live on the property being purchased. Lets first consider a scenario where two individuals who wish to co-own a property both intend to reside there. Second, we will discuss investment into rental properties and discuss the opportunities and challenges of co-ownership in this context.
Consider two friends, Annie and Barbara, are looking to purchase a home together. The home has a perfect design for their needs. It has an upper and lower floor that can be separately equipped with cooking, living, and restroom spaces. Annie and Barbara can lock and access their own spaces separately from each other. While the situation is ideal, there are a few critical questions the friends should address. First, what happens if one party wants to move out? Will this force a sale of the home? Is it possible to rent the space to a third party? Will consent from the other be required? What if one party wants to bring a significant other to live with them. How will this impact the sharing of utilities and other expenses? What if the parties no longer get along? Will there be a way to force the purchase or sale of your interest? What if one party passes away, loses their employment, or can’t contribute to major home repairs or shared mortgage costs when the time comes?
Although the circumstances above highlight a few of the issues that can arise with co-ownership, the good news is real estate professionals can assist you in preparing a predictable framework for co-ownership. With the increasing cost of purchasing a home in Ontario, co-ownership should be considered by amicable persons who want to build their equity through land ownership.
Let us consider two individuals who are looking at investing into a rental property. Although neither party will live there, several of the considerations above still apply. In addition, the parties must determine how to manage the rental income and the responsibilities of being a landlord. A further concern is how the law of partnerships might affect the parties. The fact that two people co-own real estate does not automatically make them a legal partnership. However, there are specific tax implications to be aware of if the co-ownership is deemed to be a partnership. A partnership is a legal relationship between two or more people who carry on business with the goal of profiting. The factors that result in 
a co-ownership being deemed a partnership include the sharing of a separate bank account for the venture, the development of plans for business growth and the future financing of projects, and detailed frameworks for dealing with tenants. For this reason, co-owners who wish to maintain their ability to file taxes completely independent of other co-owners should consider putting explicitly in their agreement they do not intend to have a partnership, and for dwellings with more than two tenants, to consider the use of an independent property manager to handle tenancy matters that may arise.
If you are considering investing in real estate, do not hesitate to contact Liddiard Law today for guidance. Michael Liddiard, BA MA JD