What Is a Co-Owner? How It Works, Advantages, and Example

What Is a Co-Owner?

A co-owner is an individual or group that shares ownership of an asset with another individual or group. Each co-owner owns a percentage of the asset, although the amount may vary according to the ownership agreement. The rights of each owner are typically defined in accordance with a contract or written agreement, which often includes the treatment of revenue and tax obligations. The agreements will vary depending on the nature of the asset, the governing jurisdiction, and the legal relationship between the co-owners, among other considerations.

Understanding Co-Ownership

The relationship between co-owners can vary, and the financial and legal obligations depend on the relationship of the parties as well as the benefits each party ultimately wishes to receive. For real estate, the legal concept of a co-owner, in which the parties involved may operate under arrangements such as joint tenancy or tenancy in common, has important ramifications.

Similarly, co-owners of a brokerage account or bank account are bound by strict procedures and legal constraints concerning account activity and the benefits obtained from the account during the time when the account is active. For example, when the account is closed, co-owners or legal representatives of the co-owners must be involved.

Partners vs. co-owners

Partnership and co-ownership are two different things. For example, if two brothers purchase a property, that would be considered co-ownership. Both brothers would have to agree if the property were to be sold, and the two would share the proceeds from the sale. However, the original purchase of the house was not necessarily intended as a profit-making transaction.

However, if the property was bought with the intention of earning rental income, then it would be considered a partnership because there is both joint ownership and a business motive for the investment.

Additionally, partners can act in the interests of the business or as agents of the business. With co-ownership, there is no such agency relationship. Each co-owner is only responsible for their own actions, and they do not have to act in the interests of the owned asset. As such, they may each be exposed to liability if the actions of the other co-owner were to diverge from their shared interest in the asset.

Advantages of co-ownership

Co-ownership can be of great advantage in the purchasing of a large or expensive asset, such as real estate. Because the arrangement allows for cost sharing, it can render otherwise unattainable expenses within closer reach. Some assets may also have associated costs such as insurance, fees, or taxes, which can be shared through co-ownership. In terms of management, co-ownership may also include a shared arrangement by which some of the responsibilities around the asset are divided between multiple parties.

Problems with co-ownership

Sharing ownership of an asset can also unfortunately come with risks. For example, co-owners of a firm may not agree on how to run the business. Buying out a co-owner can be very difficult if they are not willing to sell their share, and the relationship can quickly become strained as well.

Depending on the nature of the asset as well as the particulars of the co-ownership agreement, there can also be a large degree of liability to which a co-owner may be exposed. In the case of real estate, for example, if one co-owner defaults on a mortgage payment, the other co-owner is still required to pay the full amount due, even if they only own a percentage share of the property.

Another potential drawback is the human factor. Disagreements and disputes arising from differing opinions around managing or selling the asset are unfortunately not uncommon, and it is important to consider things like trust, communication, and shared vision between parties before entering into a co-ownership agreement because the personal and financial repercussions can be huge.

Real-World Example

For example, consider a situation in which the co-owner of a bank account irresponsibly gambles away a large sum of money on casino credit. The casino, as the creditor, could come after the account, leaving the responsible party exposed to a significant loss. Careful titling of accounts is also particularly important in estate planning. If someone chooses to name a co-owner to an account and is not strategic about who they name, they run an enormous risk that the assets will not be distributed as desired upon their passing.

Application to Real Estate

The purchasing of personal real estate is a common situation in which two parties might enter into a co-ownership agreement. Purchasing a home is a large financial decision, the burden of which can be eased by sharing the cost and responsibility between co-owners.

There are several types of agreements by which individuals can co-own real estate, including tenancy in common and joint tenancy. The major difference is that joint tenancy carries with it a right of survivorship, meaning that when one co-owner dies, their share in the property goes to the other co-owner(s), whereas in the case of a tenancy in common, their share would pass to the owner's heir(s).

The Bottom Line

Co-ownership over an asset can be for many things, such as a business, property, vehicle, bank or joint brokerage account, or estate. Whether co-ownership with another individual or group represents a beneficial or risky arrangement will depend largely on the nature of the situation and its obligations in terms of things like revenue, tax, law, and finance.