Today’s housing prices are higher than ever. This has put homeownership out of reach for many people, particularly in areas like Silicon Valley, where prices are through the roof.
Joint tenancy is a solution to this problem. It allows two or more people to invest in a house jointly. Even if you can’t afford the entire cost of the mortgage, you can pool your resources with others.
Obviously, this means sharing your house. But how does it actually work? Let’s take a closer look.
What Is Joint Tenancy?
Joint tenancy is a type of co-ownership, legally referred to as “concurrent real estate.” This can be confusing for some people since “tenancy” usually refers to a rental arrangement. In this case, it’s used in the broader sense of having the right to occupy a property. Partners are able to invest jointly to obtain tenancy on a property – in this case, by purchasing it.
In this arrangement, the partners must invest equally and obtain equal equity in the property. So if there are two people, for example, each person would own a 50% stake.
Joint tenancy is a type of joint ownership, typically associated with a residential property.
All parties in the tenancy purchase an equal interest in the property.
Joint tenancy creates a right of survivorship. If one of the partners dies, their heirs don’t inherit their share; instead, it passes to the other partners.
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How Does Joint Tenancy Work?
A joint tenancy is a real estate arrangement where two or more people come together as partners to purchase a property. This is commonly done by unmarried couples who want to own a house together. It can also be done by friends, relatives, or even business partners. Whatever the case, both parties put down an equal share of the down payment, and both parties’ names appear on the lease.
Each party has an equal claim to the property, and they share any benefits. For example, if the property is a rental, both will be entitled to 50% of the rent payments. If the parties decide to sell the property, they will each receive an equal share. That said, all parties are also responsible for associated obligations, such as maintenance, taxes, and mortgage payments. If your partner isn’t able to pay their share, you’ll still be responsible for the expenses.
A joint tenancy also creates a right of survivorship. When one party dies, the other parties are considered their survivor for purposes of inheriting the property. There’s no need for probate or lengthy court proceedings, and the property will transfer automatically upon the party’s demise. The only exception is if the deceased is the last remaining partner in the tenancy. In that case, since they’re now the sole owner, the property will transfer to their heirs through the normal probate process.
As we mentioned, joint tenancy is normally used for ordinary residential real estate purchases. But the same principle can be applied to other areas. It can be applied to rental and commercial properties, for instance. It can even be used for non-real estate assets like brokerage accounts and businesses.
What If A Joint Tenant Wants To Sell Their Share?
To sell their share, a co-tenant must first obtain permission from the other tenants. Otherwise, they cannot complete the transaction.
When this happens, the joint tenancy is terminated, and the new parties are forced into a different type of co-ownership agreement known as a tenancy in common. We’ll talk about that more in a little bit.
Advantages Of Joint Tenancy
So, why would you want to enter into a joint tenancy arrangement rather than some other kind of co-ownership arrangement? Here are a few good reasons:
Affordability – Joint tenancy allows you to buy a property that you otherwise would be able to afford. Instead of spending the rest of your life as a renter, you and your partner or roommate can afford to become real homeowners. If you’re frustrated with paying rent every month and earning zero equity, this is a way out.
No probate – Because a joint tenancy has a right of survivorship built-in, you don’t have to go through a lengthy probate court process. When one of the partners dies, the other partner or partners will inherit the partner’s stake automatically. Otherwise, you might have to wait months or years for the process to play out.
Equal stakes and responsibility – The joint tenancy allows all parties an equal share in the benefits. You also have equal shares of responsibility for expenses. Furthermore, all parties must agree to any significant changes to the property or its status. A single member of the partnership, for example, can’t take out a mortgage loan on the property. They would have to obtain the agreement of the other parties, and all parties would receive an equal share of the loan. They would then be equally responsible for repaying it.
Disadvantages Of Joint Tenancy
Like any other financial arrangement, joint tenancies have their share of disadvantages. Before you enter into one, here are some downsides you’ll want to consider:
You can’t pass the property on to your heirs – Just as the right of survivorship can be a major advantage, it can also be a problem. If you want to leave your property to your heirs, you won’t be able to. At least not unless you’re the last surviving member of the partnership. This won’t be an issue for couples with children, but it could be problematic in other cases.
Divorces and breakups can complicate things – Any divorce is messy. And with a joint tenancy, you’ll add similar issues to a simple breakup. Since both partners have an equal right to the property, it can be difficult to dispose of. You’ll both have to keep making payments until you can mutually agree to sell the property. Either that, or one partner will have to buy out the other partner.
More responsibility – If one of the co-tenants encounters financial hardships, the other parties are still on the hook. You could suddenly be responsible for an entire mortgage, and it might be more than you can comfortably afford.
What Is Joint Tenancy With Survivorship?
Joint tenancy with survivorship is a part of the joint tenancy arrangement. When the parties enter into an agreement, they open a joint account, which all parties have an equal right to access. The deed and any proceeds from the property are deposited into this account. When one party dies, the other parties still maintain access, and an equal right to the account’s contents.
How To Avoid Probate With Joint Tenancy
The beautiful thing about joint tenancy with survivorship is that you can automatically avoid the probate process. Under normal circumstances, when a person dies, their belongings – “estate” – are put into a trust while the state determines the rightful heirs. This process, known as probate, can last for months or even years, depending on the complexity of the estate. This could obviously be problematic for any other co-owners of a home or business venture. And thanks to the right of survivorship, it’s not a problem for joint tenants.
Joint Tenancy Vs. Tenancy In Common
If you’re just casually paying attention, it might seem like joint tenancy and tenancy in common are the same thing. And as a matter of fact, they have some things in common. They’re both concurrent real estate purchase strategies that two or more people can use. However, there are also some significant differences between the two.
As discussed, joint tenancy agreements require all parties to take on an equal share of ownership. For example, if five parties are involved, each party would own a 20% stake in the property. On the other hand, with a joint tenancy, you have more flexibility. Any party can take on any percentage stake they want. Let’s say a married couple and a single person are buying the same property. Normally, they would each own a 1/3 stake. But what if the single person is a high earner and wants a 50% share? In that case, each of the married individuals could take a 25% stake, while the single person could take a 50% stake, along with 50% of the mortgage, taxes, and other property-related expenses.
Another major difference is in the way stakes are acquired. Joint tenancies are created all at once, and cannot be amended afterwards. If one party wants out, the tenancy must be dissolved. If a new party wants to join in, the tenancy must be dissolved and then re-created. With a tenancy in common, you have way more flexibility. New partners can join at any time. They can buy out an existing partner, or all the existing partners can sell them a portion of their shares. This is obviously the best way to go if you want a more flexible arrangement that can be amended over time.
Benefits Of Tenancy In Common
Like a joint tenancy, a tenancy in common has its own share of benefits. To begin with, you can invest in a property that you wouldn’t otherwise be able to afford. This helps democratize the market so more and more people are able to participate. Beyond that, there are further benefits that are worth keeping in mind:
You can split shares in the property any way you want, rather than just equally.
Partners can join and leave the tenancy in common as needed, without changing the way the contract works for other partners.
The specifics of the tenancy arrangement are significantly more flexible.
All tenants can benefit from property appreciation and improvements.
The agreement can be created, dissolved, or amended at any time.
What Happens When Tenants In Common Want To Dispose Of The Property?
With a tenancy in common, individual members are free to sell their share without the other co-tenants’ permission. You can freely dispose of your share as you choose. This is particularly useful for roommates who may be living in a temporary arrangement. It’s also useful for business partners who may eventually want to sell out.
Just as importantly, co-tenants in a tenancy in common don’t have any right of survivorship. When one of the parties dies, their interest doesn’t pass on to the other parties. Instead, it’s treated as part of their estate; it goes into the probate process, and passes on to their heirs.
Joint tenancy is a powerful financial tool that creates a unique relationship between co-tenants. It allows two or more people to obtain equal shares in a property or business, and equally share the associated rights and responsibilities. It’s not for everybody, and there are some definite drawbacks. But under many circumstances, it’s the best way to purchase a home.
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