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Law in the Marketplace: Tips for joint tenants

Written by: John M. Cunningham

Published in the Concord Monitor (2/6/2021)

Question. My husband and I own as joint tenants both our own home and a small commercial real estate office building. My husband manages the office building: Among other things, he finds new tenants for it, he signs leases, he maintains the building, and in the winter, he deals with snow and ice around it. From a legal and tax viewpoint, are our arrangements concerning the office building reasonable? For example, should my husband form a single-member LLC, of which he will be the member and manager, to manage the office building? For liability protection, should we hire a management company to manage it instead of my husband?

Answers.

-- For readers unfamiliar with the term, a joint tenancy is a legal arrangement for owning and using property in which all of the owners — who are called joint tenants and who are often married couples — meet four requirements (traditionally called the “four unities”): (1) The parties must acquire their interest in the property in question at the same time; (2) these interests must be provided for in the same legal document; (3) all tenants must have the same interests in the property; and (4) all tenants must have the same rights with respect to the asset, including the right to use it. Under a joint tenancy arrangement, when one tenant dies, the other automatically inherits the deceased tenant’s ownership interest in the property free of probate. This is why joint tenancies are often called “joint tenancies with right of survivorship” or simply “joint tenancies WROS.”

-- The problem when married joint tenants engage in the business of renting real estate to third-party tenants is this: Lawyers for a plaintiff with a claim relating to the real estate — e.g., a serious slip-and-fall — will almost certainly argue that, whether they know it or not, the joint tenants are, as a matter of New Hampshire statutory law operating a real estate rental business as a state-law partnership. And these lawyers will argue that under New Hampshire partnership law, the assets of both joint tenants, including their building, their own home and all of their other property are at risk for the full amount of the claim. I know of no New Hampshire case law specifically addressing this claim. However, I think a judge might well buy it. In fact, because of this liability factor, it’s usually a bad idea to operate any kind of business as a New Hampshire state-law partnership.

-- Furthermore, it won’t help if your husband manages your building through a single-member LLC of which he is the member. This is because, as indicated, a court may well determine that he is not only a property manager but also a business partner with you in your real estate rental business — with full partnership liability for both of you.

-- The best way to avoid the above partnership liability risk is to for a husband-wife multi-member LLC and to your building to that LLC. If you structure this transaction correctly, it will be tax-free for federal income tax purposes, it won’t affect the annual federal income tax deduction available to you under IRC section 199A, and it won’t trigger the New Hampshire Real Estate Transfer Tax. And it will give both you and your husband a strong statutory LLC liability shield from the above claim unless negligence or other misconduct of one or both of you is the basis for the claim.

-- As for your hiring a third-party property management company to manage your property: Yes, this will decrease your liability risk as partners of a deemed partnership as long as you can document that that company is competent at managing buildings like the Building and that you’ve checked from time to time to make sure it is competently managing your building, this will probably eliminate any risk that either of you, as the members of the LLC that owns the building, will be personally liable for the above claim. But of course your hiring of the property management company may be unduly costly. And, as a former trial lawyer myself, I can guarantee you that you’ll still be sued as partners of a deemed state-law partnership unless you contribute your property to an LLC.

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