Tenancy in common vs. joint tenants

When buying a home with another person, it’s important to decide on how you’ll share legal ownership. The most common options are joint tenancy, where each party has an equal ownership share, and tenancy in common, which allows unequal shares.

The right choice for you will depend on your plans for owning the home and how you may want to divide ownership if you decide to sell or one owner dies. Here’s how each one works, the key differences, and the pros and cons.

What is joint tenancy?

Joint tenancy allows two or more people to share ownership interest of real property equally.

For example, if a married couple purchases a home as joint tenants, they each own 50% of the home. If four people buy a home, each of the joint tenants owns 25% of the home.

When making decisions, like selling or upgrading the house, all joint tenants must agree. Additionally, the property owners share the burden of paying the mortgage and for necessary repairs together.

This framework establishes a right of survivorship and the full right to occupy and use the property. If one owner dies, the surviving owner inherits their interest in the property.

Joint tenancy is established when the property is acquired and usually is explicitly stated in the property deed.

What is tenancy in common?

Tenancy in common is an arrangement where ownership of a property can be divided unequally. It also allows owners to sell their stake to anyone they like or pass their share of ownership along to their heirs.

For example, one owner could own a 70% share in a property with the other owner controlling 30%. Both parties have full use of the property.

Tenancy in common doesn’t offer the right of survivorship. An owner can sell their share to another person or investor. The deceased owner also may pass their ownership share to an heir.

Key differences explained

Buying a property with a friend or business partner is a significant financial commitment. You want a smooth relationship and a way to easily resolve any conflicts. Choosing the right form of ownership is important and depends on your situation and goals.

Explore the key legal differences of these ownership types below.

Right of survivorship in joint tenancy

For many homeowners, the right of survivorship eases many worries. If you own a home with your spouse, joint tenancy will pass ownership to the surviving spouse if one of you dies without the need to go through probate.

Joint tenancy doesn’t fit all situations. If two friends own a house together and each wants to pass on their share of their property to a relative after passing away, the joint tenancy and embedded right of survivorship could derail their plans. Instead of their 50% share passing to their heir, it would pass to the co-owner of the property.

Flexibility in ownership shares with tenancy in common

When buying a property with one or more people where each is investing a different amount, tenancy in common may be a better fit. It allows the owners to structure ownership of the home to reflect each party’s investment.

For example, let’s say three friends buy an investment property together, with each putting down different amounts. A tenancy in common agreement allows them to split ownership based on their investment, so one could own a 50% stake with the other two each owning 25%. Tenancy in common also allows one of the owners to sell their share in the property to another person, who then would assume their ownership stake.

Impact on probate and estate planning

Joint tenancy includes right of survivorship, meaning that if one owner dies their share passes on automatically to the survivor without going through probate. In the example of a married couple, the surviving spouse would automatically inherit their spouse’s ownership stake when they die.

If you want to pass your ownership stake to someone other than your co-owner, you’ll want to avoid right of survivorship. Tenancy in common allows you to sell your share to anyone you like or to pass it on to an heir of your choice through the probate process. This can make things complicated for the heirs and remaining owner, especially if there is a mortgage balance after an owner’s death.

Pros and cons of tenancy in common

Every legal agreement has benefits and drawbacks. Here’s what to consider about tenancy in common.

Variable ownership shares

In a tenancy in common agreement, property owners can allocate unequal shares to the parties involved. This allows many individuals to share ownership and potentially hold different ownership percentages.

Ability to sell or transfer shares independently

Tenants in common can sell or transfer their shares without needing approval from other owners. For example, the owner of a share of a property could transfer their ownership stake in a property to their child after their death.

While this offers flexibility for individual owners, it can create problems for the other owners because they have no say in who owns their old partner’s stake.

Possible complications in estate planning

With tenancy in common, a property stake passed on when one owner dies must go through probate court. For some heirs and remaining owners, this can be a challenging situation.

Understanding tax implications

Every owner must manage their income tax obligations related to the property separately. For example, if this is a shared rental property, each owner would report their income earnings separately to the IRS.

But in terms of property taxes, the local government issues a single property tax bill. The owners must decide among themselves who pays how much of the tax bill.

About the decision-making flexibility of tenancy in common

Tenants in common don’t have to agree about everything. This allows owners to make decisions without permission from the other owners. For example, if one owner chooses to sell their stake, the other owners have no say in who they sell their stake to.

Pros and cons of joint tenancy

Joint tenancy allows owners to enjoy an equal stake in a property and avoid probate court if one owner dies.

Avoidance of probate

Individuals who enter joint tenancy can avoid probate if one owner dies. By default, the surviving owner takes possession of their stake in the property.

Equal ownership shares

Joint ownership means that each owner has an equal right of ownership. This offers benefits and downsides. For example, if one owner invites a friend to stay for a time, the other owner cannot remove the guest.

Challenges in selling or modifying ownership

If you want to sell or renovate the home, joint tenants must agree on the decision. When one owner wants to sell and the other doesn’t, the sale might grind to a halt. Or if one plans a renovation that the other isn’t on board with, moving forward might be impossible.

For joint tenants who disagree, it’s possible for one to break the joint tenancy agreement with the help of a lawyer in some states.

Understanding tax considerations

Joint tenancy comes with equitable ownership shares, which means each owner bears an equal share of the property tax bill. When collecting income or sale proceeds for the property, it’s split in equitable shares, which in turn splits up the taxes owed.

About the decision-making process in joint tenancy

When you agree with your fellow property owner, or owners, joint tenancy can go smoothly. But if you disagree on renovations or when to sell the house, things can turn sour quickly.

FAQ

Here are answers to common questions about tenants in common vs joint tenancy.

Which tenancy is best for unmarried couples?

Tenancy in common offers more flexibility in co-ownership, including the ability to leave your stake to someone other than your co-owner. For some unmarried couples looking to buy a home, tenancy in common is the right fit.

Why is it wise to avoid joint ownership?

Joint ownership doesn’t allow for unequal shares and includes rights of survivorship, which can be a drawback for many. If you want to leave your share of property ownership to someone other than the co-owner, tenancy in common may be a better fit.

Does marriage affect joint tenancy?

When married, joint tenancy is renamed to tenancy by the entirety. This change occurs because a married couple is treated as a single legal entity and gives both spouses 100% ownership in the property.

Why is joint tenancy sometimes called a poor man’s will?

Joint tenancy is sometimes considered a poor man’s will because it involves the right of survivorship. With that, the property owner’s share passes directly to the co-owner of the property without going through probate court.

How do you end a joint tenancy?

A joint tenancy can be ended through a negotiation with the other owner, sale of the property, death of a joint tenant, or a divorce. But the rules may vary based on the laws in your state.

The bottom line: Weigh the pros and cons of joint tenancy vs. tenants in common

Before jumping into homeownership with other parties, it’s helpful to consider all your options. Both joint tenancy and tenancy in common offer a way to own a home with another person. But the right choice varies based on your situation and preferences. Consider seeking legal advice from a real estate attorney before moving forward.

When you decide on the right ownership arrangement for your property purchase, take the next step by applying for a home loan with Rocket Mortgage^®.