By: Ronald L. Finck, Esq.
It is not uncommon in the farm community for real estate to be owned jointly by two or more owners. Many times, parents will transfer their real estate to more than one child as part of their estate and farm succession plan. Joint ownership of real estate often presents unique problems for the joint owners. A co-ownership agreement should be considered to set forth how the joint owners will use the real estate and how the expenses associated with the real estate will be paid. That agreement could also address what the rights and responsibilities of the owners would be in the event of one of their deaths or if one of the joint owners decides to separate from the joint ownership.
If one or more of the owners decide they no longer want to be joint owners and if the joint owners cannot agree on a sale of the property or how to divide the property among themselves, the Pennsylvania legal system provides a remedy known as partition, which allows joint owners of real property to sever their ties to one another. In some ways, partition is like the division of property in a divorce. Two or more parties are splitting their jointly-owned assets and going their separate ways. Unfortunately, like divorce proceedings, partition can be costly, time-consuming, and full of aggravation.
In Pennsylvania, partition is a two-step process. First, the court determines whether partition is appropriate. Second, the court determines how the real property should be divided up so that each joint owner receives a fair payment or distribution. The first step to partition is relatively simple. Any party with an ownership interest in real property has a right to have the property partitioned. Therefore, all that the party seeking partition has to do is show that he or she has an ownership interest in the property. Partition does not require the consent or permission of the other joint owner(s).
Determining how the property should be equitably divided among the joint owners is often much more difficult. Frequently the court will employ a special master to assist with the process. The first thing to be considered is whether the property can be physically divided. If a court finds that the property can be physically divided, it must physically divide the property and award each joint owner his or her respective share. This process may be relatively uncomplicated when dealing with large, undeveloped, and unimproved tracts of farmland or woodland. More often, partition involves property that is improved with buildings or other improvements that are not easily divisible. Further, factors such as zoning regulations, access to public roads, soil quality, agricultural conservation easements, etc., can prevent or complicate an equitable division of the property. Thus, the court must find a way to equalize each joint owner’s share.
Equalizing the shares can be an onerous process, rife with potential for disputes. Sometimes a joint owner will have to pay another joint owner a sum of money in order to equalize the interests. If the parties are unable to agree on who gets what part of the property, or if there are more joint owners than parts into which the property can be divided, the court may auction off the parts between the joint owners and make awards of money, real estate, or both, to the parties according to their ownership interests.
Income tax consequences of the division and sale of property is another consideration. If the division involves two or more properties that are not adjacent to each other, the division may have to be structured as a like-kind exchange under IRC §1031 to defer income tax consequences.
If the court finds that the property cannot be physically divided, it can order that the property be sold. Such a sale may be limited to the joint owners or open to the public, depending on the circumstances.
The attorneys at Mette, Evans & Woodside can assist you with the various complex issues that can arise from the joint ownership of real property.