If you are separated or divorced and considering co-owning a property with your ex-spouse, financial experts advise proceeding with caution. While uncommon, such arrangements can work if a detailed co-ownership agreement is put in place.
What to Include in a Co-Ownership Agreement
According to FP Answers, a co-ownership agreement should clearly define expectations around the use, maintenance, expenses, and eventual sale of the property. It must also address contingencies such as disagreements or the death of one owner. Without these provisions, co-ownership can lead to complications.
It is also important to consider how joint ownership may affect future relationships. Retaining shared family assets post-divorce, such as a sentimental family cottage, can be practical, but overly complex financial ties may create complications with future partners.
Risks of Joint Real Estate Investment After Divorce
If the primary motivation for purchasing a new property is speculation that prices will rise, that may not be a sound investment rationale. Real estate values can decline as well as increase, and if prices move in the opposite direction, both parties could be left holding an asset worth less than they paid. Experts recommend maxing out registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) before betting on a real estate investment.
Additionally, if the purchase is financed with a mortgage, both parties would likely remain legally responsible for the debt. This could limit each person's borrowing capacity for other needs or become awkward if one party faces financial difficulty and the other must make payments.
Lender Considerations and Dispute Resolution
Lenders evaluate borrowers using several criteria, including capacity to service debt payments. Real estate is not a liquid asset, and carrying mortgage debt on a jointly owned property could strain cash flow. If one party wishes to sell and the other does not, or if the co-ownership agreement does not adequately address dispute resolution, co-owned real estate can become tricky.
Ownership Structure: Tenants in Common vs. Joint Tenants
If you do proceed, you may want to ensure ownership as tenants in common rather than joint tenants with right of survivorship. Many spouses hold property as joint tenants, meaning the deceased's share automatically passes to the surviving owner. With a tenants-in-common structure, each owner's share can instead be directed to their estate or another designated beneficiary, which may better align with your intentions post-divorce. Tenants-in-common is more common for non-spouse co-owners.
Ultimately, while buying an investment property with your ex-spouse is possible, it requires careful planning and professional advice to avoid financial and legal pitfalls.
