Joint Tenants (Tenancy) vs Tenants (Tenancy) in Common Ownership
When you invest in a new property, you place a lot of your liquidity into an asset that you may own for a considerable period. When you invest with others, such terms as joint tenants vs tenants in common are important to understand. This term helps you and your investing partners set clear parameters around the ownership of the property. The decision between joint tenancy and tenancy in common will hinge on such factors as your relationship with the other purchaser(s), your budgets and your needs over time.
When you buy a property in a partnership, there are several reasons to define the ownership:
- This outlines how to share property income
- This sets boundaries for ownership rights if one of the partners passes away
- This manages distribution of monies from sale proceeds for the property
- This directs property disposal if the partners are also in a personal relationship and that relationship ends
What do these terms mean?
Joint tenants (tenancy) refer to equal division of rights and obligations associated with a property among the owners.
Tenancy in common refers to division of interest in a property that can be equal but can also assign different proportions of the property to different co-owners.
What are the pros and cons?
With joint tenancy, passing the property rights to co-owners after death is automatic, which means that the property won’t get stuck in probate.
Another benefit of joint tenancy is that there is no need to put together a will or other paperwork to transfer the share of the property in the case of a co-owner’s passing. If co-owners are married and then go through a divorce, each party receives an equal share. Also, no other legal documents, such as a deed of trust, are needed, making the legal fees cheaper. Income distribution is equal, removing the need for more paperwork to establish the distribution percentages.
With tenancy in common, one advantage is that any co-owner can sell or transfer interest in the property to anyone they like, without having to get the permission of any other co-owner.
One drawback for joint tenancy is that none of the co-owners can sell of transfer their property share without the unanimous consent of the other co-owner(s). Another potential drawback for joint tenancy is the risk involved when partners have not invested equally. If there are three co-owners but one has put up half the money, that partner still only has a third share in the property under joint tenancy. This can lead to problems if the co-owners are also in a relationship. Selling joint tenancy properties can be difficult because of the need to get mutual consent from all of the other co-owners. If unanimous mutual consent cannot be obtained, the matter can end up in court – and saving on legal expenses is one of the main advantages of this arrangement otherwise.
In some cases, co-owners opt for joint tenancy with right of survivorship. This is a different form of joint tenancy that allows for a co-owner’s share to pass to a descendant. One disadvantage of this setup is that it exposes the descendant to potential litigation from creditors. In case of divorce, the creditor could pursue the descendant’s former spouse. Also, the descendant cannot sell or transfer their share in the property without mutual consent from the other co-owner(s), and if the transfer does go through, that could cause significant capital tax liability for the descendant.
Some disadvantages for tenancy in common include the higher legal costs. Co-owners need to put together a will and a deed of trust to head off the possibility of disputes in the future. If a co-owner dies, his or her estate may try to force the surviving spouse out of the property.
What are the major differences?
Simply put, joint tenancy automatically divides the property interest equally among all co-owners and keeps the ownership within that group, unless all other members of the group consent to a sale or transfer of one co-owner’s portion. This automatic transfer process makes legal documents for disposition unnecessary.
Tenancy in common allows greater flexibility in the division of property interest and disposition of shares, but that also means that more legal paperwork is needed to ensure that the transfer goes according to the wishes of the co-owner getting rid of the interest.
What happens in the event of death?
In joint tenancy, if one co-owner passes away, that co-owner’s rights and obligations in the property pass to the other co-owner(s). Using joint tenancy means that the property does not have to go through the probate process and that there is no need to file a claim for the security of ownership.
In tenancy in common, the estate of the deceased co-owner includes the share in this property, so it could be passed to heirs or disposed of in another way, depending on the provisions in the deceased co-owners will. This makes the investment part of each co-owner’s legacy. You also get a share proportional to what you invested in the property, instead of having the property divided equally no matter what the actual financial investment from each party was. With a clear deed of trust, selling, splitting and transferring a share in the property is simple.
Make sure to consult with a real estate lawyer.
Choosing between joint tenancy and tenancy in common has to do with the needs of all of the co-owners involved. When equal distribution of rights, obligations, income and tax burden makes sense, and the property does not need to remain in the estate of any co-owner, then joint tenancy makes sense. Tenancy in common is the better choice when those factors differ in any way.
You’ll want to consult with a real estate lawyer before entering either type of arrangement with fellow investors in a property. Entering contracts without having a lawyer review them opens the door to exposure to claims down the road. Errors in the documents can lead to court judgments that radically alter the nature of the shared investment, and in cases where friends or relatives enter investments as co-owners, these disputes can end up ruining relationships. Take the time, and budget the money, to have all the documents reviewed, so that you can save time, pain and money down the road.