What is joint tenancy?

When it comes to gaining the benefits of owning property, most look at the possibilities in black or white: You either own property or you don’t. But there’s another option that can open doors for many potential buyers: Joint tenancy, which is when two (or more) parties join forces to buy a property together.

This arrangement comes with its own important guidelines, but it can be an excellent solution for people who want to share both the costs and rewards of property ownership. Joint tenancy creates clear legal guidelines that protect everyone involved while making property transfers surprisingly straightforward – and helping the dream of owning a home into a reality.

Key takeaways:

For a quick summary of joint tenancy, here are the important points to come away with:

• Joint tenants own a property in tandem, and they can go anywhere onto the property without restriction.
• Under joint tenancy, all parties share ownership of the property equally.
• With joint tenancy, surviving tenant(s) take ownership of the shares held by another tenant upon their death. This rule supersedes even a will.

Note: We largely discuss joint tenancy in context of real estate, but other types of property can be classified within this agreement, including bank accounts, cars, and investments.

How does joint tenancy work?

Essentially, joint tenants share equal interest a property they own together, and legally, any tenant can access any part of the property at any time. But as noted, one of the most critical elements of joint tenancy concerns what happens to the property if one of the owners passes away.

Joint tenancy with rights of survivorship (JTWROS)

The “rights of survivorship” is one of the elements that makes joint tenancy unique – it ensures that the property automatically transfers to the surviving owners if one owner dies. This aspect of joint tenancy overrides all other claims, including those from the deceased owner's family members.

In addition to receiving the property's deed, the surviving owners also inherit:

• The decedent’s property interest
• All mortgage responsibility
• Any existing liens or debts tied to the property
• The deceased owner's share of property taxes and maintenance costs
• Any outstanding property management agreements or tenant leases

Property sales under a joint tenancy

As you might expect, things get complicated when one of the co-tenants in a joint tenancy agreement decides they want to sell their share of a property. For starters, they must obtain the consent of the other tenants before the transaction can proceed.

It should be noted that a joint tenant can transfer their shares to another person instead of selling them; however, transferring their share of the property terminates the joint tenancy agreement and forces the new co-owner to enter a new ownership arrangement with the remaining co-tenant(s).

There are also legal and tax consequences when these sales take place. For starters, the selling tenant could be liable for capital gains taxes on any profit from their share, while the remaining owners might need to restructure their financing if the mortgage was based on the original tenants’ creditworthiness. Additionally, the new ownership arrangement that replaces the joint tenancy – typically a tenancy in common – requires updated legal documents and may trigger a property tax reassessment.

How to create a joint tenancy

There are almost no restrictions on who can create a joint tenancy – the opportunity exists for married (or unmarried) couples, family members, friends, colleagues, business partners, and more.

Given the strict legal ramifications of this agreement, there are some proscribed steps you need to take to put a joint tenancy in place. They include:

• Time of acquisition: Because all joint tenants’ names must appear on the dead, everyone must acquire their interest in the property at the same time.
• Legal documentation: The property deed must explicitly state that ownership is held "as joint tenants with rights of survivorship" to establish the proper legal framework, which is – given the complexity of the arrangement – essential.
• Equal ownership shares: Each joint tenant will own an identical percentage of the property, regardless of how much money they individually contributed to the purchase.
• Right of possession: All joint tenants must have equal rights to use and occupy the entire property, not just a specific portion of it.
• Financial arrangements: Clear agreements should be established upfront regarding how mortgage payments, property taxes, maintenance costs, and other expenses will be divided among the owners.
• Exit strategy plan: Joint tenants should discuss and document what happens if someone wants to sell their share or if the relationship between owners deteriorates.

It’s not required, but given that joint tenancy includes strict legal conditions and definitions, it definitely makes sense to hire a professional lawyer to create your arrangement.

When to consider a joint tenancy

Joint tenancy is a smart – and simple – arrangement if you want to co-own a property with another party. It is also beneficial if you want to avoid probate court and ensure your property transfers quickly and privately to your co-owner when you pass away. This makes it an attractive option for people who want an uncomplicated way to gift their property without the delays and costs of going through probate.

Pros and cons of joint tenancy

As with all these types of arrangements, there are both pros and cons that come with joint tenancy. They include:

Pros

• Affordability: Because joint tenancy divides the cost of a property, it inherently makes a property more affordable.
• Simplicity: By establishing a clearly delineated financial and ownership structure, joint tenancy creates a straightforward framework that helps owners avoid the messy complications of disparate ownership percentages, complex profit-sharing formulas, and lengthy probate proceedings.
• Equal protections: Joint tenancy offers equal shares of the property, so everyone profits – or loses – by its maintenance. This helps create strong incentive for everyone to work hard and protect their investment.

Cons

• Shared risk: If one of your co-tenants falls upon financial hard times, you have to pick up the slack and ensure the mortgage payments are paid monthly.
• Possible relationship tension: Given the many decisions that need to be made to maintain a property, it’s only natural that disagreements will likely occur. You should be prepared to navigate some conflict over the course of the arrangement.

How a tenancy in common differs from a joint tenancy

Joint tenancy is similar to tenancy in common (TIC), in which two (or more) people own a property together. However, unlike joint tenancy, TIC offers owners the opportunity to own unequal percentages of the property – one owner may possess 70% of the property, for instance, while the other has 30%.

Also, because there are no writes of survivorship, the property can go to an owner’s beneficiaries or heirs when they pass away.

Joint tenancy or tenancy in common for married couples

Sometimes married people opt to buy homes without their spouse. This can bring financial benefits, but it can also be complicated. Joint tenancy for married couples offers simplicity in the complicated world of property ownership, including equal property rights and automatic transfer to the surviving spouse without probate.

However, it requires both spouses to agree on all major property decisions, can complicate divorce proceedings, and may override estate planning goals by automatically transferring the property regardless of what's written in a will.

FAQ

Given the byzantine world of joint tenancy, it only stands to reason that questions arise. Here are some of the most common.

What forms of property can be held in joint tenancy?

Several types of property can be classified within this arrangement, including bank accounts, cars, artwork, and investments. Real estate remains the most common usage of this arrangement, but joint tenancy can also cover personal belongings.

What happens when joint tenants separate?

If joint tenants decide to separate (for whatever reason), they must agree on how to divide the property because neither party can sell their share – or the entire property – without unanimous consent from all owners. The separation itself doesn't automatically dissolve the joint tenancy arrangement, so the legal ownership structure remains intact until it is formally ended.

What happens if one person wants to leave a joint tenancy?

One person can transfer their interest to another party if they want to leave a joint tenancy, but this action automatically converts the arrangement from joint tenancy to tenancy in common for the remaining owners. That means the new party doesn't gain the same survivorship benefits that joint tenants enjoy.

What type of ownership is best for avoiding probate?

Joint tenancy with right of survivorship is the best ownership type for avoiding probate. Why? Because when one owner dies, the property automatically transfers to the surviving owners without court involvement, which bypasses lengthy and costly probate process entirely.

Can joint tenants have unequal ownership shares?

No, owners in a joint tenancy arrangement must have equal shares of property ownership. If you want to have unequal ownership, tenancy in common may be a preferable way to go.

The bottom line: Property ownership could work for you with joint tenancy

In the convoluted world of real estate, joint tenancy offers a simpler way of purchasing and dividing up property ownership. It offers a more affordable option, a straightforward division of the property (to put it simply: it must be equal), and it also allows for a concrete way to give your property to others when you pass away.

It also comes with some potential downsides, such as possible tension with the other owners and the need for all owners to maintain financial viability. But if you take the right steps, such as carefully choosing your co-owners and having honest conversations about finances, long-term goals, and exit strategies, joint tenancy can be a positive way for people to achieve their dreams of property ownership.

Interested? Contact Rocket Mortgage® to explore your options today!