Co-ownership means that more than one person owns a single piece of real estate. There are a few different ways to structure co-ownership, but two of the most common are tenancy in common and joint tenancy.
Understanding the nuances of tenancy in common versus joint tenants is essential for estate planning and managing your property effectively. The two arrangements differ in several key ways, including rights of survivorship, how ownership is divided, and the ability to transfer your ownership stake to someone else.
Here’s what you need to know.
What is tenancy in common?
Tenancy in common is a way for two or more people to own property together, where each person holds an individual stake in the property. It’s not necessarily a 50-50 split, either; one owner may have a 75% share, and the other may own 25%. Owners can also acquire their shares at different times.
One of the key features of tenancy in common is that each tenant can do what they want with their share. They can sell it, give it away, or leave it to someone in their will without asking permission from the other owners. If an owner dies, their share goes to their estate, not automatically to the other owners.
Key characteristics of tenancy in common
- No right of survivorship. When one owner dies, their share doesn’t automatically go to the other owners.
- Flexible ownership shares. Ownership doesn’t have to be equal.
- Individual control. Each tenant has control over their own share of the property.
What is joint tenancy?
Joint tenancy is a type of co-ownership in which all owners have equal rights to the property. To create a joint tenancy, you need to show equal interest, acquisition at the same time, ownership described in the same document, and equal rights of possession.
The key feature of joint tenancy is what’s known as the right of survivorship. This means that if one joint tenant dies, their share of the property automatically transfers to the surviving joint tenant or tenants, without the need for a will or probate court.
The four unities of joint tenancy
To create a joint tenancy, four conditions must be met:
- Time. All owners must acquire their interest in the property at the same time.
- Title. All owners must acquire their interest in the property through the same document, such as a deed.
- Interest. All owners must have equal ownership shares.
- Possession. All owners must have equal rights to possess the entire property.
Key differences between tenancy in common and joint tenancy
Tenancy in common and joint tenancy agreements have some significant differences that could have a big impact on your estate planning.
Right of survivorship
With joint tenancy comes the right of survivorship. That means if one owner dies, their share automatically transfers to the surviving owners. This avoids the need for probate, which can be time-consuming and costly.
Tenancy in common doesn’t include the right of survivorship. Instead, when a tenant in common dies, their share becomes part of their estate and is distributed according to their will or state law.
Ownership shares
With joint tenancy, ownership shares must be equal. If there are three joint tenants, each owns a third of the property.
But with tenancy in common, ownership shares can be unequal. For example, one tenant might own 25%, another 50%, and the third 25%.
Transfer of ownership
If you’re a joint tenant, it can be difficult to transfer your interest without ending the joint tenancy. This is because joint tenants all have to agree to the transfer.
On the other hand, a tenant in common can easily sell or transfer their share without needing the other owners’ permission. This provides more flexibility.
Creditor claims
Both tenancy in common and joint tenancy can be affected by creditors. If one co-owner defaults on a debt, creditors may be able to place a lien on the property, potentially leading to a forced sale.
Advantages and Disadvantages of Each Ownership Structure
Both joint tenancy and tenancy in common have their pros and cons, depending on your individual circumstances and priorities.
Joint Tenancy
Advantages:
- Joint tenancy simplifies estate planning because of the right of survivorship. When one owner dies, their share automatically transfers to the surviving owners, bypassing the need for a will or trust.
- It avoids probate, which can save time and money in settling an estate.
Disadvantages:
- Joint tenancy requires equal ownership shares. If you want to contribute differently to the purchase, this might not be the best option.
- If one owner has creditor problems, it can affect all owners of the property.
Tenancy in Common
Advantages:
- Tenancy in common allows for unequal ownership shares, offering more flexibility in how you structure the ownership.
- It’s easier to transfer ownership. You can sell or gift your share without disrupting the co-ownership arrangement.
Disadvantages:
- The lack of right of survivorship can make estate planning more complex and require probate. Your share will be distributed according to your will or state law, which may not be what you intended.
- There’s a greater potential for disputes among co-owners because everyone may have differing interests and ideas about the property.
How does this affect estate planning?
The type of co-ownership you choose seriously impacts your estate planning. Think about how each option affects what happens to your share of the property when you die.
The best choice depends on your specific situation, what you’re hoping to achieve, and your relationships with the other owners. You’ll want to consider whether you’re married, your family dynamics, and if this involves a business partnership.
I strongly recommend talking to a lawyer to figure out the best ownership structure for you. They can give you personalized advice based on your needs and circumstances. This isn’t something you want to guess at!
In Conclusion
Tenancy in common and joint tenancy differ significantly in terms of ownership shares, rights, and what happens when one owner dies. Understanding these differences is crucial for making the right choice when buying property with others.
Choosing the right ownership structure is a big decision that can have lasting legal and financial consequences. Don’t rush into it. Take the time to carefully consider your options and seek advice from qualified professionals.
Talking to a lawyer and a financial advisor can help you fully understand the implications of each type of ownership so you can make an informed decision that aligns with your individual circumstances and goals.