My brother and I want to buy a house for cash as tenants in common. He has more cash, so would own 70%, while I would own the other 30%. I would like to live in the house with my wife and family. My brother does not want/need me to pay rent to him – he just wants the equity stake in the house. Do I HAVE to pay rent to him for his greater share? If we agree to have no rental agreement, will the IRS consider this a gift and come after my brother for?
Tenants in common have an undivided right of occupancy of the whole property. When TIC’s are used to subvert things like condo-conversion limitations, there is a side agreement that is not part of title as to occupancy of specific units. So as long as you understand that your brother has a right of occupancy that he does not presently intend to exercise, your exclusive occupancy is not a taxable situation.
Timothy McCormick
Libris Solutions – Dispute Resolution Services
1990 N. California Blvd., 8th Fl
Walnut Creek, CA 94596
Tenants in common (TICs) have equal right of possession, irrespective of percentage of ownership, and hence no payment of rent is expected nor required.
There are a couple of small footnotes to the foregoing. First, it’s perfectly possible for one TIC to give up some of his rights to the other TIC by contract, for example, your brother could lease you his right to shared possession for $x a month. I don’t necessarily recommend this, but I do suggest that the two of you have a simple written agreement setting forth your understandings about ownership, possession, rent or lack thereof, payment of expenses including taxes and insurance, how long the agreement is to last, and what happens when one or the other of you wants out – do you sell, does someone have an option to buy the other’s share, etc.
Also, the fact that both of you will have a right of possession does not mean that your brother can suddenly show up some midnight and insist on becoming your roommate. A TIC out of possession ordinarily must go through a legal process to enforce his rights against a TIC in possession who is reluctant to share (refusal to share possession upon demand is called an “ouster” and the law frowns on self-help to create one, or to end one).
Finally, bear in mind that all such deals eventually come to an end, either by one or the other of the TICs having a change of circumstances or a change of mind, and the changes someday might include disputes among the TIC’s heirs. The legal remedy available to unhappy co-owners is a partition lawsuit, which can sometimes be avoided by anticipating the need to wind up the arrangement sometime in the future. In any event, I don’t see any particular tax issues in rent-free sole possession by one TIC. There is no gift involved.
Bryan Whipple
Bryan R. R. Whipple, Attorney at Law
P O Box 318
Tomales, CA 94971-0318