Buying Real Estate - Why Ownership Structures Matter
Introduction
When multiple parties take title to real property they can take title as joint tenants or as tenants in common. We refer to these ownership structures as joint tenancy and tenancy in common. Please find below a summary of these ownership structures.
Joint Tenancy
Joint tenancy is a type of ownership structure for land (Real Property). Joint tenancy is where two or more persons each own an undivided interest in the whole. The individuals, who are called joint tenants, share equal ownership of the property and have an equal and undivided right to keep or dispose of the property. One of the most important features of a joint tenant ownership structure is the Right of Survivorship.
Under the right of survivorship, if a joint tenant dies the interest of the deceased joint tenant is extinguished, and the interests of the surviving joint tenants are enlarged by the deceased’s share until the final surviving joint tenant holds the property as sole owner. For example, if there are three (3) joint tenants and one of the joint tenants dies, the two (2) surviving joint tenants would then hold the property jointly with one another. If the second joint tenant dies, the surviving joint tenant would hold the property as sole owner. The right of survivorship takes precedence over any testamentary disposition of the property by a joint tenant – meaning the interest passes outside of the person’s Last Will and Testament.
Although Joint tenancy is often used as an ownership structure for spouses and common-law partners, it is not exclusively for spouses and common-law partners. The properties of a joint tenant relationship are the same whether the joint tenants are husband and wife, parent and child, or two friends.
Tenants in Common
Tenancy in common is a second popular form of ownership of real property. Tenancy in common is different than joint tenancy, in that each tenant in common has a separate and distinct interest in the property that need not be equal. For example, tenants in common can each hold a 50/100th interest in the property, or title can be structured so that one person holds 1/100th and the other holds 99/100th.
One common example where parties may want to hold property as tenants in common is where the contribution to the property is unequal and the parties wish to have this reflected in the ownership of the property. For example, where one person contributes 70% of the purchase price and another contributes 30% of the purchase price. In this scenario, the parties may want to have the ownership of the asset be 70/100th for the first person and 30/100th for the second.
Another common example is where a person is co-signing a mortgage. Often where a party is co-signing a mortgage the bank may require the co-signor be on title. Oftentimes the true owner of the property (the one purchasing the property, living in the property, and generally assuming all the responsibility of owning the property) is a younger individual with a parent being co-signer. In this scenario, it is common for the parent to be removed from title once the child is able to obtain a mortgage without the co-signor. For financial and estate planning reasons, it may be in the best interest of the co-signer to take title as a tenant in common. Every time there is a transfer of title, land transfer tax must be paid (unless there is an exemption). The amount of land transfer tax charged is based on the value of the interest being transferred. For example, let’s say we have a $500,000 property and we are removing a parent from title. If the parent were on title as an equal owner, the transfer would result in land transfer tax in the amount of $3,825.00. But, if the parent was registered on title as a 1/100th interest holder, when this parent is removed from title there would only be $76.50 in land transfer tax payable, a savings of almost $3,750.00.
Because the tenancy in common does not involve a right of survivorship, an interest held as a tenant in common passes through the estate of the deceased.
DISCLAIMER: The information provided within this article is for general information purposes only and is not intended to be a substitute for legal and other professional advice. Legal and other professional advice is recommended. While every effort is made to ensure that the information provided is current and accurate, all persons involved in the preparation of this article disclaim any warranty as to the accuracy, currency, or absoluteness of the information. The author shall not be responsible nor liable for decisions resulting from, or related to, the information or opinions within the article.