House Co-Ownership With Friends – What You Need To Know
It is no longer possible to co-sign on a mortgage in Canada for a friend or family member. Instead, a would-be co-signer now often chooses to co-own the property with the primary borrower. The co-owner with good credit will sometimes only be a 1% owner, while the primary borrower who is being helped out has the other 99% ownership.
People choose to co-own property for many other reasons. For one thing, it can make owning a home within reach. For instance, if both co-owners intend to live in the property and contribute equally financially, the shares would probably be 50% & 50%.
Many people are starting to choose to buy a home with friends because it can make buying a home more affordable. However, buying a house with friends or coworkers is a big deal. It requires coordinating your finances and assembling a team of professionals the co-owners trust to get the deal done. It may also require a co-ownership agreement.
If you are thinking about buying a house with friends, you must understand the process. You also must be certain that you trust your co-owner’s financial stability.
Your friend is probably a great person who normally treats you very well. However, you must consider how they treat their creditors. It is a bad idea to tie yourself financially to an irresponsible friend. As a co-owner, you could be held accountable for their bad decisions. That’s a serious commitment. If you trust your friend to be responsible, working together as friends to buy a house or multifamily can be extremely rewarding for both parties.
What You Need To Know About Title & Co-Ownership
When you choose to buy a house with a platonic friend or coworker, your lawyer will probably advise you all to hold the title as tenants in common.
As discussed in an earlier blog, tenants in common can have different ownership percentages over the property. They can also choose who inherits their interests in the property.
If they do not have a last will and testament covering their interests held as tenants in common, their share will be divided according to Alberta’s intestacy laws. The essence of those rules is that the value of the deceased’s estate will be distributed to their next of kin by process of law.
It is important to note that if you co-own a property with someone who is not your spouse, your spouse does not accrue dowers rights to that property in Alberta. To learn more about dowers rights and co-ownership title choices, please read last month’s blog.
Taxes On Property Co-Owned With Friends
When you buy a house with friends or coworkers, you will have to co-ordinate with them for tax purposes. You will all be required to report things like how much property tax was paid by which owner.
If co-owners report their numbers separately and those numbers do not add up correctly, it can trigger an audit or other negative consequences. As a result, it may be best for all co-owners to use the same tax accountant. If everyone uses the same professional, then that accountant can ensure the numbers in the various filings add up correctly when considered together.
An accountant will also be able to better determine the tax consequences of renovating or reselling the property for each owner. For example, suppose one co-owner lives in the house as their primary residence. In that case, they may accrue fewer capital gain taxes at resale than a co-owner who uses it as an income-generating property.
What Is A Co-Ownership Agreement?
A co-ownership agreement is a legally binding and enforceable document that governs the use and maintenance of the property. Having a well-written agreement is important to preventing disputes between co-owners and may also be referenced by mortgage issuers during their due diligence.
The usage agreement can delegate particular areas to particular co-owners or determine who is responsible for paying for maintenance & renovations. It can also limit the potential uses of the property.
A co-owned property with a well-drafted co-ownership agreement and multiple units can be operated much like a condominium. In that situation, co-owners would be responsible for maintaining their unit. They would also be expected to contribute to the upkeep of the shared areas and structures. This would be based on their percentage of ownership.
Co-Ownership Agreement Enforceability & Mortgage Liability
If you choose to buy a house with friends and get a co-ownership mortgage, you must trust that they are financially responsible. Depending on the mortgage and co ownership type, you may be on the hook for their bad decisions.
Even if you are not directly responsible for the mortgage on the other owner’s portion of the property, you still may have to come up with their end if they are in default. For example, if the bank decides your co-owner has breached their agreement and demands payment in full, you will have to either come up with the money and buy their portion or sell it to an outsider.
You must fully trust the financial stability of your potential co-owners. There can be severe repercussions from co-owning property with an unreliable or unreasonable friend.
If you trust your friends and are looking to get a co-ownership mortgage, contact The Mortgage Group Inc in Calgary now at (403) 571 – 8142. We can help you begin the process and determine how much you qualify for.