Five Common Real Estate Ownership Mistakes and How to Avoid Them
For most people, real estate is the most valuable asset they own. Whether it’s a primary residence, a second home, a rental, or an inherited property, the rules surrounding ownership can get surprisingly complicated. Below are five common mistakes even well-intentioned property owners make:
1. Adding children to the title
This is, hands down, the most frequent mistake I see. Many parents assume that adding children to the deed now will guarantee a smooth transfer later. What they often don’t realize is that doing so can saddle those children with significant capital gains tax liability when they eventually sell the property.
If your goal is to ensure that your children inherit your property with minimal tax consequences, it is almost always better for them to receive it at your death through a Will, Trust, or, at the very least, a Transfer on Death Deed.
2. Not verifying how marital property is titled
Married couples can own property as tenants by the entirety with right of survivorship. This form of ownership offers two major advantages: (a) when one spouse dies, the surviving spouse automatically becomes the sole owner, and (b) the property is protected from the creditors of either spouse individually.
If you and your spouse own property together, confirm that your deed uses this exact language. Joint tenants with right of survivorship is not the same. And if you acquired property together before you married, consider updating the deed to reflect your marital status and secure the added protections of tenancy by the entirety.
3. Holding rental property in your personal name.
Rental properties can be excellent investments, but they shouldn’t be owned individually. Holding a rental in your own name exposes all your personal assets if a tenant is injured and sues you successfully. A better approach is to title each rental property in its own limited liability company (LLC). An LLC limits exposure so that only the assets of that LLC, typically the property and its bank account, are at risk. Creating and maintaining an LLC for this purpose is straightforward, but you must treat it as a separate entity. Leases should list the LLC as landlord, and rent should be deposited into the LLC’s bank account.
4. Buying property with family or friends.
It always sounds simple at the start. But issues can arise when co-owners disagree about selling, improvements, expenses, or usage. Should someone who uses the property more pay more? Are costs always split evenly? What if I want to sell and my co-owners don’t? Any time clients plan to buy property with anyone other than their spouse, I recommend a written co-ownership agreement.
This legally binding document identifies each owner’s rights and responsibilities from day one and, importantly, explains the methods for dissolving the co-ownership arrangement should one owner wish to sell their interest. Without such an agreement, the only way to force a sale is through a partition suit - a court action that can result in either a buyout or a court-ordered sale. Partition suits are expensive and time-consuming, and can be entirely avoided by a well-drafted co-ownership agreement.
5. Allowing property to pass through probate.
Probate is the court-supervised administration of an estate. If you die owning real property in your sole name and you have not designated a beneficiary via a Transfer on Death Deed, that property must be probated. Nothing can be done with the property until the required filings are submitted to the probate office, and probate taxes are paid. Often, this creates delays and imposes a burden on your loved one, but the good news is that it can all be avoided. A living trust or a properly executed and recorded Transfer on Death Deed allows the property to pass directly to your intended beneficiaries without court involvement.
If you believe you’ve made one of these mistakes, we’re happy to review your situation and discuss potential solutions. In most cases, the issues can be corrected with the right paperwork.
Disclaimer: This article provides general legal information. The actions described should not be taken without first consulting your attorney and/or tax professional.