On Jan. 1, residents in Maryland joined those in the District, Massachusetts, Connecticut, Iowa, Vermont, New Hampshire and New York in the ability to have same-sex marriages. While laws in the District and those states may have settled the big question on who can get married, they raise a number of practical real estate questions.
One question arises from the manner in which co-owners hold title to their property. Traditionally, they can own their property as tenants in common or as joint tenants with rights of survivorship . Married couples have the additional advantage of being able to own real property as tenants by the entirety. Now, same-sex couples can own real property as tenants by the entirety. What does this mean and why is it relevant?
Tenants in common each share their percentage interest in the real property. Business partners typically use tenancy in common as their preferred way to hold title. Each co-owner can sell and/or borrow against his percentage interest in the property. One main attribute is that each co-owner can bequeath his interest in his will. Each co-owner’s creditors can attach that co-owner’s percentage interest in the real property to satisfy their claim.
Joint tenants with rights of survivorship are each deemed to own their pro rata interest in the real property. If there are two joint tenants, then each is deemed to own a 50 percent interest. A joint tenant cannot sell or borrow against his interest. Any attempt to do so will convert the joint tenancy into a tenancy in common. A joint tenant also cannot bequeath his interest. By definition, when one joint tenant dies, his interest automatically gets transferred to the surviving joint tenant.
Many same-sex couples use the joint tenancy to ensure that upon death, their partner becomes the 100 percent sole owner. However, one main drawback is that property held in a joint tenancy is vulnerable to claims against either joint tenant. So for example, if one joint tenant is held liable for a car accident, and has a judgment entered against him, that judgment is a lien and will attach to his interest in any real property he owns jointly.
The strongest way to hold title, available only to married couples, is the tenancy by the entirety. Like the joint tenancy, the tenancy by the entirety has the attribute of survivorship. Meaning, when one tenant dies, the surviving tenant automatically becomes the sole owner. The reason this is considered to be the strongest form of ownership is that the claims of one tenant’s creditors do not attach to the real property owned by the tenancy by the entirety. The one exception is if the creditor is the Internal Revenue Service.
“Same sex couples who now own real property as joint tenants, and who marry, should retitle their property as tenants by the entirety,” said Lawrence S. Jacobs, a lawyer in the Rockville office of McMillan Metro, who specializes in estate planning for same-sex couples.
Retitling is a relatively simple matter. All that is involved is to prepare and record a new deed. Deeds to modify the tenancy are exempt from transfer and recordation taxes in all three local jurisdictions. Roy L. Kaufmann, a lawyer at Jackson & Campbell in Washington, agrees: “Why not enjoy the protections against creditors that the tenancy by the entirety provides?” Kaufmann added that “unless estate planning dictates otherwise, tenants in common should also consider retitling their property into a tenancy by the entirety.”
Additional questions arise when same-sex couples residing in Maryland or the District own property in a state that has not yet legalized same-sex marriage: Can or should that couple retitle their second home or investment property? What happens when one partner dies? Which state’s inheritance laws apply?
The answers depend on the state where the property is located. For example, in Delaware, which recognizes civil unions but not same-sex marriages, couples can hold real property as tenants by the entirety, but in order to retitle property already owned, the law requires that all lenders consent to such change. Jacobs said his clients “have not experienced any problems obtaining lender consents in Delaware,” but he said that in Virginia — a state that does not recognize same-sex marriages, civil unions or domestic partnerships — “the best you can do is a joint tenancy with rights of survivorship.”
At the federal level, the Garn-St. Germain Act provides that real property transfers between spouses are exempt from the “due-on-sale” clauses contained in virtually all mortgages. It appears that when a couple resides in a state where same-sex marriage is legal, transfers between those partners will also be exempt.
But what about when that same couple seeks to transfer property located in a state that does not recognize their marriage? Will they be subject to the onerous due-on-sale clause that permits a lender to declare the loan to be in default and accelerate the entire unpaid principal balance?
These issues are far from clear. As with most radically new laws, it will take many years for the regulations and court cases to clarify just how the new laws will apply to the various real world scenarios.
Regulators and jurists may use this opportunity to rethink whether marital status is relevant at all when determining private property rights.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining legal counsel. Jacobs can be reached at firstname.lastname@example.org.