Dear Alex:
A partner and I are buying an investment property together, and the title company has asked how we want to hold title together. They have told us that we can hold title as tenants in common or as joint tenants, but the differences are unclear. What should we do?
For non-married co-owners, joint tenancy and tenancy in common are the two preferred means of holding title. Although I frequently recommend co-owners hold rental properties within an LLC that holds title to the property, holding title in an LLC is not always the best option — for example, when the rental income does not justify the $800 annual franchise tax that LLCs must pay. Married couples, on the other hand, usually hold real estate as community property with right of survivorship.
In this instance, as unmarried co-owners who have elected not to hold your property with an LLC, whether you should hold the property as joint tenants or as tenants in common depends on your long-term ownership objectives.
The most basic element of a joint tenancy is that if you own a piece of property as a joint tenant, then you and the other joint tenants own the property equally, each with equal ownership interests to the entire property. When one joint tenant dies, the deceased person’s interest does not pass to his or her heirs; instead, the surviving joint tenants automatically receive the deceased person’s property interest.
This is called the “right of survivorship.” A joint tenancy also avoids probate on the death of a joint tenant, because the deceased person’s interests automatically transfer to the remaining joint tenants. Joint tenancies are slightly more difficult to create and maintain than tenancies in common; to create a joint tenancy the co-owners must obtain title at the same time, in equal proportions, with equal co-ownership rights.
With a tenancy in common, on the other hand, the tenants can own different shares of the property, equal or unequal, and each party is free to transfer, sell or dispose of their share of the property as they choose. Unlike a joint tenancy, the rights of the owners of a tenancy in common can vary, depending upon how much monetary claim was made by each tenant.
For example, with three brothers, one brother can own a 50 percent interest in the property, and the other two brothers each have a 25 percent ownership interest in the property. Each brother can put his share of the property in his estate plan and pass the interest on to his spouse, children, or whomever he chooses.
Also, one brother may choose to sell his property interest to a third party, and can do so without the consent of the other two brothers. Since there is no right of survivorship in a tenancy in common, when one tenant in common passes, their ownership interest goes to their own heirs or devisees, not to the remaining surviving tenants in common.
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